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Report on Experiences with Structural Separation 2011

The OECD Competition Committee held several discussions on structural separation which resulted in a report approved in 2011. These discussions also led to a revision in December 2011 of the 2001 Council Recommendation Concerning Structural Separation in Regulated Industries.

Report on Experiences with Structural Separation (2006) Recommendation of the Council concerning structural separation in regulated industries (2001) Restructuring Public Utilities for Competition (2001)

This report reviews the experience of structural separation ten years after the adoption of the 2001 OECD Council Recommendation Concerning Structural Separation in Regulated Industries with a focus on four sectors: electricity, gas, railways and telecommunications. It shows that structural separation remains a relevant remedy to advance the process of market liberalisation. However, the impact of separation policies on investment incentives has been an issue throughout the sectors. Corporate incentives to invest require full consideration in the assessment of whether structural separation may be appropriate for a sector. As a result, the 2001 Recommendation was amended by the OECD Council on 13 December 2011 to address the role that corporate incentives to invest can play in assessing the desirability of structural separation in regulated industries.

http://www.oecd.org/dataoecd/19/32/39796493.pdf



Rep

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Exp

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with

Str

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ral S

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COMPETITION COMMITTEE

JANUARY 2012

Report on Experiences with Structural Separation

COMITÉ DE LA CONCURRENCE

JANVIER 2012

Rapport sur les Expériences en Matière de Séparation Structurelle

Rap

po

rt sur les Exp

ériences en Matière d

e Sép

aration S

tructurelle

3

EXPERIENCES WITH STRUCTURAL SEPARATION © OECD 2012

FOREWORD

On 26 April 2001, the OECD Council adopted a Recommendation Concerning

Structural Separation in Regulated Industries suggesting to Member countries

that when regulated firms have activities that are potentially competitive and

that are linked to non-competitive activities, such as natural monopoly

activities, governments should consider the benefits and costs of structural

measures separating two activities. The Recommendation was accompanied by

a detailed report, and both advocated careful consideration of the potential pros

and cons of structural separation versus the potential pros and cons of

behavioural measures. In 2006, the Competition Committee reported to Council

on the implementation of the Recommendation. This report focused on five

topics: benefits of structural separation, costs of structural separation, balancing

benefits and costs, experiences with separation in energy, railways,

telecommunications and postal services and government actions with respect to

structural separation in OECD countries. It concluded that the Recommendation

was important and relevant and should remain in its current form. The Council

endorsed these conclusions and invited the Competition Committee to continue

reporting back on the implementation of the Recommendation.

This third report reviews the experience of structural separation ten years after

the adoption of the Recommendation with a focus on four sectors: electricity,

gas, railways and telecommunications. It shows that structural separation

remains a relevant remedy to advance the process of market liberalisation.

However, the impact of separation policies on investment incentives has been

an issue throughout the sectors and the 34 member countries surveyed in the

report. Corporate incentives to invest require therefore full consideration in the

assessment of whether structural separation may be appropriate for a sector. As

a result, the 2001 Recommendation was amended by the OECD Council on

13 December 2011 to address the role that corporate incentives to invest can

play in assessing the desirability of structural separation in regulated industries.

The revised Council Recommendation is appended to this Report.

5


TABLE OF CONTENTS

REPORT ON EXPERIENCES WITH STRUCTURAL SEPARATION ...................... 7

1. Introduction ...................................................................................... 7 2. Structural separation as a remedy ................................................... 16 3. Developments in gas ....................................................................... 27

3.1 Gas sector in Chile ............................................................ 27 3.2 Gas sector in Estonia ........................................................ 28 3.3 Gas sector in the European Union .................................... 28 3.4 Gas sector in Greece ......................................................... 40 3.5 Gas sector in Ireland ......................................................... 41 3.6 Gas sector in Israel ............................................................ 42 3.7 Gas sector in Portugal ....................................................... 42 3.8 Gas sector in the Netherlands ........................................... 43 3.9 Gas sector in Poland ......................................................... 44 3.10 Gas sector in Slovenia ...................................................... 45 3.11 Gas sector in Turkey ......................................................... 45

4. Developments in electricity ............................................................ 46

4.1 Electricity sector in Australia ........................................... 46

4.2 Electricity sector in Chile ................................................. 48

4.3 Electricity sector in Estonia .............................................. 49

4.4 Electricity sector in the European Union .......................... 50

4.5 Electricity sector in Finland .............................................. 56

4.6 Electricity sector in Germany ........................................... 57

4.7 Electricity sector in Greece ............................................... 58

4.8 Electricity sector in Ireland ............................................... 59

4.9 Electricity sector in Israel ................................................. 60

4.10 Electricity sector in Italy ................................................... 60

4.11 Electricity sector in Mexico .............................................. 61

4.12 Electricity sector in New Zealand ..................................... 62

4.13 Electricity sector in the Netherlands ................................. 64

4.14 Electricity sector in Portugal............................................. 65

4.15 Electricity sector in Switzerland ....................................... 66

4.16 Electricity sector in Slovenia ............................................ 67

6


5. Developments in telecommunications ............................................ 68

5.1 Telecommunications sector in Australia ........................... 68

5.2 Telecommunications sector in Chile................................. 71

5.3 Telecommunications sector in Estonia ............................. 71

5.4 Telecommunications sector in the European Union ......... 72

5.5 Telecommunications sector in Finland ............................. 75

5.6 Telecommunications sector in Israel ................................ 75

5.7 Telecommunications sector in Italy .................................. 76

5.8 Telecommunications sector in New Zealand .................... 78

5.9 Telecommunications sector in Poland .............................. 79

5.10 Telecommunications sector in Slovenia ........................... 81

5.11 Telecommunications sector in Sweden ............................. 82

5.12 Telecommunications sector in Switzerland ...................... 82

5.13 Telecommunications sector in the United Kingdom ........ 83

6. Developments in rail .......................................................................... 85

6.1 Rail sector in Australia ..................................................... 85

6.2 Rail sector in Belgium ...................................................... 88

6.3 Rail sector in Canada ........................................................ 88

6.4 Rail sector in Chile ........................................................... 91

6.5 Rail sector in Estonia ........................................................ 92

6.6 Rail sector in the European Union .................................... 93

6.7 Rail sector in France ......................................................... 96

6.8 Rail sector in Germany ..................................................... 98

6.9 Rail sector in Israel ........................................................... 98

6.10 Rail sector in Italy ............................................................. 99

6.11 Rail sector in the Netherlands ......................................... 100

6.12 Rail sector in Slovenia .................................................... 101

6.13 Rail sector in Spain ......................................................... 102

6.14 Rail sector in Sweden ..................................................... 102

6.15 Rail sector in the United Kingdom ................................. 105

6.16 Rail sector in the United States ....................................... 107

7. Corporate Incentives to Invest and Structural Separation ................ 108

8. Conclusion........................................................................................ 112

ANNEX: RECOMMENDATION OF THE COUNCIL CONCERNING

STRUCTURAL SEPARATION IN REGULATED INDUSTRIES.............................. 118

7


REPORT ON EXPERIENCES WITH STRUCTURAL SEPARATION

1. Introduction

In 2001, the OECD Council adopted its ―Recommendation of the Council

Concerning Structural Separation in Regulated Industries‖,1 suggesting to

Member countries that they consider the implementation of structural measures

in regulated sectors in appropriate circumstances. This report provides an

update on Member countries‘ experiences in applying the Recommendation.

The Recommendation was accompanied by a detailed report that

considered the benefits and the costs associated with the adoption of structural

separation policies.2 The main body of the Recommendation takes a similar

approach, advocating careful consideration of both the potential pros and cons

of structural separation versus the potential pros and cons of behavioural

measures. It reads as follows:

When faced with a situation in which a regulated firm is or may in the

future be operating simultaneously in a non-competitive activity and a

potentially competitive complementary activity, Member countries

should carefully balance the benefits and costs of structural measures

against the benefits and costs of behavioural measures.

The benefits and costs to be balanced include the effects on

competition, effects on the quality and cost of regulation, the

transition costs of structural modifications and the economic and

public benefits of vertical integration, based on the economic

characteristics of the industry in the country under review.

The benefits and costs to be balanced should be those recognised by

the relevant agency(ies) including the competition authority, based on

principles defined by the member country. This balancing should

1 Structural Separation in Regulated Industries (2001).

2 OECD, Restructuring Public Utilities for Competition (2001) and OECD,

Structural Separation in Regulated Industries (2001).




8


occur especially in the context of privatisation, liberalisation or

regulatory reform.

A ―Report on Experiences with Structural Separation‖ was published by

the Competition Committee in 2006. The report considers the costs and benefits

of structural separation, examines in detail a selected set of examples of

structural separation in five sectors and provides a summary of country

experiences across the OECD as a whole. The 2006 report concludes that:

The Recommendation is still important and relevant;

Its suggestion to balance the costs and benefits of structural separation

still holds, as does the view that the costs and benefits will differ

based on the economic characteristics of the industry in the country

under review; and

The Council Recommendation should remain in place as it is.3

This second report provides an update on experiences with structural

separation in Member countries with respect to four industries: gas, electricity,

telecommunications and rail.4 Ten years on from the adoption of the

Recommendation, the conclusions remain broadly the same. Structural

separation is a remedy of continued relevance, which can both advance the

process of market liberalisation and address some of the difficulties inherent to

behavioural remedies and more complex and intensive sector regulation.

Nevertheless, structural separation may not be necessary or appropriate in all

industries or markets. In particular, the impact of structural separation or the

lack thereof on corporate incentives to invest in network industries has become

a prominent issue. The choice of structural versus behavioural measures, in a

given set of circumstances, therefore remains a matter that requires careful

evaluation.

Structural solutions to competition problems differ from behavioural

measures insofar as structural policies modify the incentives, whereas

behavioural remedies try to redress specific conduct in a context where

3 OECD Competition Committee, Report on Experiences with Structural

Separation, published 7 June 2006, p.6.

4 With respect to Member countries that have joined the OECD since the

publication of the 2006 report, information of a more general nature is

provided, not being limited to recent developments.



9


incentives remain essentially unchanged.5 The Recommendation elaborates

upon this distinction, noting that ―behavioural policies, unlike structural

policies, do not eliminate the incentive of the regulated firm to restrict

competition‖ and that ―despite the best efforts of regulators, regulatory controls

of a behavioural nature, which are intended to control the ability of an

integrated regulated firm to restrict competition, may result in less competition

than would be the case if the regulated firm did not have the incentive to restrict

competition‖. It further emphasizes that ―certain forms of partial separation of

a regulated firm (such as accounting separation or functional separation) may

not eliminate the incentive of the regulated firm to restrict competition and

therefore may be less effective in general at facilitating competition than

structural policies‖. While structural remedies are frequently viewed as more

intrusive upon property rights than behavioural remedies,6 in the longer run the

―clean break‖ offered by structural solutions may prove to be less intrusive than

requiring a firm to adhere to detailed, prescriptive behavioural commitments

that are unending in nature.

In regulated infrastructure industries, structural separation typically divides

a formerly integrated company into competitive and non-competitive parts. The

crux of separation is not merely a wholesale/retail divide; rather, the objective is

5 The 2001 report describes the distinction between these two types of

measures as ―those that primarily address the incentives on the incumbent to

restrict competition ("structural") approaches, and those that primarily

control the ability of the incumbent to restrict competition ("behavioural"

approaches)‖, and emphasises that ―[u]nder behavioural approaches, the

regulator must struggle against the incentives of the incumbent to deny, delay

or restrict access. Compared to the incumbent firm the regulator is usually at

a disadvantage with respect to information and to the possible instruments of

control. As a result, the level of competition under behavioural approaches is

less than if the incumbent did not have the incentive to restrict competition.

Certain tools, such as accounting separation, management separation or

corporate separation, are not effective on their own, but may support other

approaches, such as access regulation‖; see OECD, Restructuring Public

Utilities for Competition (2001), at p.53. See also P. Hellström, F. Maier-

Rigaud & F. Wenzel Bulst, ―Remedies in European Antitrust Law‖ (2009) 76

Antitrust law Journal 43 for further discussion of the incentive-based

distinction between behavioural and structural remedies. Of course, structural

remedies may not only change the incentives but may simply take away the

ability of the firm to influence the network.

6 Under EU competition law, for example, structural remedies can be imposed

for breaches of the competition rules only where there are no equally

effective behavioural remedies available, or where any equally effective

behavioural remedy would be more burdensome than the structural remedy.



10


to isolate only those assets that cannot be replicated.7 This separation can take a

variety of forms ranging from behavioural to structural measures. Accounting

separation constitutes the weakest form of separation available, and ownership

separation the strongest. In between these poles, ―six degrees‖ of functional (or

operational) separation options have been identified: creation of a wholesale

division; virtual separation; business separation; business separation with

localised incentives; business separation with separate governance

arrangements; and legal separation involving separate legal entities under the

same ownership.8 While ownership separation clearly is a structural measure,

separation measures falling short of ownership separation, such as for example

the Independent Transmission Operator (ITO) concept in energy, are typically

considered to be behavioural measures9, with the exception of certain types of

functional separation, that is, the separation of ownership and control that has

sometimes been considered a hybrid form between the two, for example the

Independent System Operator (ISO) in energy.10

The extent to which separation of a vertically integrated firm is viewed as

economically and commercially desirable, and the form of separation preferred,

tends to vary from sector to sector. As ―forcing‖ competition via structural

separation can have significant costs—both financial and efficiency-based—it is

important to determine whether increased competition in the market concerned

actually brings with it increased benefits for consumers. In the European Union

(EU), for example, Member States are required to implement either ownership

or functional separation in the electricity and gas sectors, whereas functional

separation in telecommunications markets is presented as an exceptional

measure for implementation only in cases of persistent market failure. Factors

of relevance to the determination as to whether and what form of separation

may be appropriate in a particular sector include the presence of economies of

7 European Regulators Group, Opinion on Functional Separation (ERG (07)

44) 2007, p.8.

8 M. Cave, ―Six Degrees of Separation: Operation Separation as a Remedy in

European Telecommunications Regulation‖ 64 Communications and

Strategies (4th

quarter 2006), p.1-15.

9 See the Recommendation, in particular the passages quoted above.

10 See for example OECD, Restructuring Public Utilities for Competition

(2001), p. 14. In contrast to this, others such as the French

telecommunications regulator, l‘Autorité de Régulation des Communications

Électroniques et des Postes (ARCEP), would expressly categorise legal

separation falling short of full ownership separation as a form of structural

separation; see ARCEP, La Lettre de l‘Authorité, No.55 – March/April 2007,

p.4.


11


scale and scope, the likely impact on levels of investment, the rate of

technological innovation in a sector and the effectiveness of other forms of

regulatory intervention. Moreover, the costs and benefits associated with each

form of separation differ. While accounting separation, the least intrusive form

of separation, may help to eliminate price discrimination against downstream

competitors, non-price discrimination may necessitate a more intensive solution

such as functional or even ownership separation.

Although the Recommendation is directed at OECD Member countries,

experience to date suggests that the decision to implement structural separation

is often taken by the vertically integrated firm itself, rather than by the national

regulatory agencies or competition authority. A firm may decide to separate

voluntarily in order to pre-empt more complete forms of separation being

imposed by legislation or in the framework of competition proceedings; it may

prefer structural measures as a means by which to escape demanding

behavioural regulation; or separation may present the most attractive business

option for the profit-maximising firm. It is unusual for a vertically integrated

firm to drive the separation process entirely of its own initiative—typically, the

issue is first introduced by regulators or other government bodies. Nevertheless,

once separation has been placed on the policy agenda, ―voluntary‖ compliance

by firms is not uncommon. This has been the experience in the

telecommunications sector in Sweden, for example, where the incumbent‘s

decision to adopt functional separation voluntarily has thus far negated the need

for the regulator to exercise its statutory power to impose compulsory functional

separation on the firm. Voluntary commitments involving structural separation

play an important role in competition law practice. While it is common practice

that structural commitments (business divestitures) are offered to obtain

regulatory clearance in the field of merger control, voluntary structural

separation commitments are increasingly offered also in the field of antitrust

enforcement in recent years. Notably the European Commission has accepted

binding commitments with respect to structural separation when settling

antitrust investigations without a formal finding of breach.11

On the other hand, in certain circumstances separation is an involuntary

process for the vertically integrated firm, being a remedy imposed upon it under

statute, or by regulators or competition law enforcers. For legislators and sector

regulators, structural separation offers a more durable resolution in cases of

persistent market failure. Structural separation can provide the means by which

to remedy market problems that behavioural regulation alone may fail to

11

See the RWE, ENI and E.ON cases discussed below. Structural commitments

were also applied in EU State Aid cases.

12


prevent, the classic example being non-price discrimination. Separation may

also be preferred in circumstances where the alternative behavioural regulation

would prove complex or difficult to design, follow and enforce. Structural

solutions bring the benefit of legal certainty, and typically, a simplified

regulatory regime. Compulsory separation imposed by regulation has been

common in the energy sector, particularly within the EU, where Member States

must comply with the requirements of the European Commission‘s energy

markets liberalisation programme.

Structural separation is occasionally imposed by competition authorities

for similar reasons. Where a breach of the competition rules is on-going and

linked to a vertically integrated market structure, separation can provide an

effective and durable remedy. Moreover, solutions of a structural nature require

comparatively little ex post monitoring, unlike behavioural remedies, which

frequently require competition authorities to engage in supervisory activities of

a quasi-regulatory nature.12

The break-up of AT&T in 1984, on foot of an

antitrust lawsuit brought by the Department of Justice in the United States, is a

prominent example of the use of competition law enforcement powers to effect

structural separation of an integrated firm.13

It is generally accepted that structural separation may involve a trade-off

between efficiency and competition. Since the Recommendation was issued in

2001, a voluminous literature has been produced that considers the value of

structural separation in view of its associated costs and benefits. There is

significant evidence that profit maximising vertically integrated firms typically

make efficient decisions, from the point of view of both, the firm and of

consumers, but where the vertically integrated firm controls a bottleneck

monopoly, foreclosure can be a problem.14

Others argue that discrimination by a

vertically integrated firm is never a rational strategy, on the basis that any gains

12

For a discussion of the behavioural-versus-structural remedies debate in the

EU context, see P. Lowe & F. Maier-Rigaud, Chapter 20, ―Quo Vadis

Antitrust Remedies‖ in B.E. Hawk (ed.), Annual Proceedings of the Fordham

Competition Law Institute (2008, New York), pp.597-611.

13 United States v. AT&T 552 F. Supp. 131 (D.D.C. 1982).

14 See F. Lafontaine & M. Slade, ―Vertical Integration and Firm Boundaries:

The Evidence‖ (2007) 45(3) Journal of Economic Literature 629-685, and

P.L. Joskow, Chapter 11, ―Vertical Integration‖ in ABA Section of Antitrust

Law, Issues in Competition Law and Policy, Volume I (2008, Chicago),

pp.273-292.

13


at the retail level will be negated by concomitant losses at the wholesale level;15

yet, plausible theories of anticompetitive leverage and foreclosure of upstream,

downstream and even related retail markets can be found in both literature and

case law.16

Within the literature addressing specifically structural separation and

its effects, one finds both work that supports and work that criticises the use of

such policies in order to address competition problems. There is no clear

consensus among scholars as to the objective value of structural separation in

the abstract. Separation can be costly, both in terms of one-off costs of

implementation and longer term efficiency losses.17

Nonetheless, within

assessments of specific examples of structural separation, it is clear that

economic benefits have been observed.18

It is important to note the strong

15

See, for example, D.W. Carlton, ―Should ―Price Squeeze‖ be a Recognized

Form of Anticompetitive Conduct?‖ (2008) 4 Journal of Competition Law &

Economics 271, at p.275, for a clear statement of the Chicago School ―one

monopoly profit‖ precept.

16 See, for example, N. Economides, ―Vertical Leverage and the Sacrifice

Principle: Why the Supreme Court Got Trinko Wrong‖ (2005) 61 NYU

Annual Survey of American Law 379 and D. Geradin & R. O‘Donoghue,

―The Concurrent Application of Competition Law and Regulation: The Case

of Margin Squeeze Abuses in the Telecommunications Sector‖ (2005) 1

Journal of Competition Law & Economics 355 for discussion of potential

harms to competition.

17 See OECD, Restructuring Public Utilities for Competition (2001) at p.24, for

a discussion of the economics of scope associated with vertical integration:

―Vertical integration may enhance the availability of information (allowing

more efficient incentive contracts); may reduce transactions costs and

improve investment in relationship specific assets by overcoming hold-up

problems; and may reduce the distortions associated with market power at

one or both of the two levels.‖ While many of these potential sources of cost

efficiencies can, alternatively, be exploited through contractual arrangements

between separate firms, in practice contractual arrangements often prove to

be impractical. However, the 2001 report argues that while the theoretical

possibility of economies of scope may be recognised, assessing their

magnitude in practice is very difficult (ibid., pp.24-26).

18 For a sample of the broad range of positions on the topic, see R.W. Crandall,

J.A. Eisenach & R.E. Litan, ―Vertical Separation of telecommunications

Networks: Evidence from Five Countries‖ (2010) 62(3) Federal

Communications Law Journal 493-539; M.G. Pollitt, ―Electricity

Liberalisation in the European Union: A Progress Report‖ EPRG Working

paper 0929, published December 2009; M. de Nooij & B. Baarsma, ―Divorce

comes at a price : An ex ante welfare analysis of ownership unbundling of the

distribution and commercial companies in the Dutch energy sector‖ (2009)

37 Energy Policy 5449-5458; T. Tropina, J. Whaley & P. Curwen,


14


influence of industry sponsorship on this particular issue, which raises some

questions with regards to the impartiality of work dealing with the topic.19

An issue of increasing importance, in the context of the debate regarding

structural separation, is the impact of such arrangements on investment

incentives, in particular relating to infrastructure development. On the one hand,

uncertainty regarding the possible implementation of structural separation or

misaligned incentives for the infrastructure operator where separation has

already been implemented may deter otherwise desirable investment in the

network. Given that many regulated industries will require significant

―Functional separation within the European Union: Debates and Challenges‖

(2010) 27 Telematics and Informatics 231-241; R. Cadman, ―Means not

Ends: Deterring Discrimination through Equivalence and Functional

Separation‖ (2010) 34 Telecommunications Policy 366-374; S. Dorigoni & F.

Pontoni, ―Ownership Separation of the Gas Transportation Network: Theory

and Practice‖ IEFE Working Paper Series No.9, published March 2008; R.

Gonçalves & A. Nascimento, ―The Momentum for Network Separation: A

Guide for Regulators‖ (2010) Telecommunications Policy 355-365; B.

Howell, R. Meade & S. O‘Connor, ―Structural Separation versus Vertical

Integration: Lessons for Telecommunications from Electricity Reforms‖

(2010) 34 Telecommunications Policy 392-403; A. Prandini, ―Good, BETTA,

Best? The Role of Industry Structure in Electricity Reform in Scotland‖

(2007) 35 Energy Policy 1628-1642; M.G. Pollitt, ―The Arguments For and

Against Ownership Unbundling of Energy Transmission Networks‖ (2008)

36 Energy Policy 704-713; M.A. Jamison & J. Sichter, ―Business Separation

in Telecommunications : Lessons from the US Experience‖ (2010) 9(1)

Review of Network Economics, Article 3 (available at www.bepress.com/rne);

R.W. Crandall, ―The Remedy for the ―Bottleneck Monopoly‖ in Telecom:

Isolate It, Share It or Ignore It‖ (2005) 72 University of Chicago Law Review

3; S. Everett, ―Deregulation and Reform of Rail in Australia: Some Emerging

Constraints‖ (2006) 13 Transport Policy 74; B. Moselle & D. Black,

―Vertical Separation as an Appropriate Remedy‖ (2001) 2(1) Journal of

European Competition Law & Practice 84; and F. Kirsch & C. von

Hirschhausen, ―Regulation of NGN: Structural Separation, Access

Regulation, or No Regulation at All?‖ (2008) 69 Communications & Strategies

63. A report issued recently by the Berkman Center for Internet & Society,

Next Generation Connectivity: A review of broadband Internet transitions and

policy from around the world (February 2010) Final Report, contains a

comprehensive review of the available literature assessing the effectiveness of

―open access‖ policies, including functional separation, in the

telecommunications sector.

19 Berkman Report, cited fn. 18 above.

http://www.bepress.com/rne

15


investments in the coming years,20

the claimed negative effects of structural

separation on investment incentives and the cost of capital is an issue of general

relevance. On the other hand, where vertical integration remains in place, there

is a risk that the integrated firm will engage in strategic under-investment in its

infrastructure, in a bid to circumvent access obligations. In such circumstances,

the decision to separate may lead to greater investment in infrastructure

development. Implementation of structural separation can also result in

increased investment by new entrants into the competitive portions of the sector.

Even with respect to vertically integrated firms, the effects of uncertainty on

investment incentives can be over-exaggerated—in particular, where the sale of

the separated asset is conducted in such a manner as to secure its full market

value. Thus, the impact of structural separation on investment incentives

remains an open yet critically important issue to be considered.

The Recommendation on structural separation incorporates the various

aspects of this lively debate. It asks Member countries to evaluate both the

likely costs and benefits of structural separation within regulated sectors. These

costs and benefits are then weighed against each other, in order to assess

whether and what form of separation should be mandated for vertically

integrated firms in that market. Structural separation is not always the necessary

or best response to vertical integration of firms that operate in both competitive

and non-competitive markets, but it can be an economically efficient one in

both the short and longer terms. The following sections of the report consider

the availability of structural separation as a remedy and experiences in

implementing structural separation in Member countries since the publication of

the 2006 report, examining four regulated sectors: gas, electricity,

telecommunications and rail. Information is also included regarding the

structure of these markets in the four countries that have joined the OECD since

2006, namely Chile, Estonia, Israel and Slovenia. The report concludes with a

discussion of the major themes emerging from the evidence on experiences with

structural separation.

20

In the EU, for example, energy investments in the order of €1 trillion will be

required over the course of the next ten years; see Communication from the

Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions, Energy

2020: A Strategy for Competitive, Sustainable and Secure Energy, SEC(2010)

1346, COM(2010) 639 final, published 10 November 2010, at p.2. The

transition to high speed fibre telecommunications networks is another area

where very substantial investments are required to fund socially-desirable

infrastructure development.

16


2. Structural separation as a remedy

Structural separation remedies are not available in all OECD countries and

the conditions for structural separation differ: while structural separation is

usually imposed as a remedy for a competition violation, some competition

authorities can impose structural separation remedies merely to preserve a

competitive market structure, without finding an infringement of competition

law (―objective structural separation).21

The table below identifies those where

such remedies are available. Note that the revised EU competition law regime

introduced by Regulation 1/200322

made the application of the EU competition

provisions by national competition authorities and national courts compulsory,

irrespective of national sector regulation, to the extent that the conduct ―may

affect trade between Member States‖.23

Based on Article 5 of Regulation 1/2003

this does, however, not extend to procedural law, so that structural remedies are

available to competition authorities in EU Member States only to the extent that

they are foreseen under national law.24

Moreover, further sector-specific powers

may in the future be introduced at the domestic level as EU Member States

implement EU Directives relating to the sectors under consideration.

21

See e.g. the powers of the Competition Commission in the U.K. under the

Enterprise Act 2002.

22 Regulation (EC) 1/2003 of 16 December 2002 on the implementation of the

rules on competition laid down in Articles 81 and 82 of the Treaty (OJ L 1/1,

2003), hereafter ―Regulation 1/2003‖. See E. de Smijter and L. Kjølbye ―The

Enforcement System Under Regulation 1/2003‖ (2007), p. 87-180 in J. Faull

and A. Nikpay (eds.), The EC Law of Competition, 2nd

edition, Oxford

University Press, for a good overview. 23

See in particular Article 3 of Regulation 1/2003.

24 To the extent that national competition law provisions do not foresee

structural remedies but the conduct in question ―may affect trade between

Member States‖ of the EU, it can be argued that such measures may still be

required under EU law if alternative remedies would threaten effective

enforcement of competition law in the EU. In addition, again conditional

upon trade between EU Member States possibly being affected, the EU

Commission is always in a position to relieve the national competition

authority and initiate proceedings under Article 11(6) of Regulation 1/2003

itself, thereby allowing structural remedies to be imposed.

17


Table 1. Structural separation remedies available under national law

Country Structural measures

available under

national competition

law

Structural measures

under national law

specifically for

telecommunications

Structural

measures under

national law

specifically for

energy

Australia --- --- ---

Austria X X X

Belgium --- --- X

Canada X X ---

Chile X X ---

Czech

Republic

--- --- X

Denmark --- --- X

Estonia --- --- X

Finland --- --- X

France --- --- X

Germany X --- X

Greece X --- X

Hungary --- --- X

Iceland X X X

Ireland X X X

Israel X X X

Italy --- --- X

Japan X --- ---

Korea X X ---

Luxembourg --- --- X

Mexico X X ---

Netherlands X --- X

New Zealand --- --- ---

Norway X X X

Poland --- --- X

Portugal X --- X

Slovak

Republic

--- --- ---

Slovenia X X X

Spain X X X

Sweden --- --- X

Switzerland --- --- ---

Turkey X --- X

UK X X X

US X X --- Date: August 2010

18


Country Competition Law Provisions

Australia

Divestiture (which would include structural separation) is not available

as a remedy under the abuse of dominance provisions in Australian

law.25

Austria

Section 26 of the Cartel Act 2005 empowers the Cartel Court to order

measures intended to weaken or even eliminate the dominant position,

which presumably could encompass structural separation where

appropriate.26

Competition law applies in the telecommunications sector.27

Belgium

Under Belgian competition law, it appears that there is no power to

impose structural remedies – instead, only fines or cease & desist

orders can be imposed.28

Canada

Structural separation can be ordered by the Canadian Competition

Tribunal (under section 79(2) of the Competition Act) where a breach

of the abuse of dominance provision has been established and there is

no alternative suitable remedy.29


Chile

Structural separation is a remedy that may be granted by Chile‘s

competition law court, the Antitrust Commission, if it finds a violation

of the competition rules. Cases are brought before the Antitrust

25

OECD Country Studies, Australia – The Role of Competition Policy in

Regulatory Reform (2009), p.20 available on the OECD‘s website at

http://www.oecd.org/dataoecd/55/44/45170413.pdf. 26

Global Competition Review, The European Antitrust Review 2010: Austria,

available on GCR‘s website at www.globalcompetitionreview.com. 27

International Comparative Legal Guide, Telecommunications Laws and

Recommendations 2010: Austria, available at ICLG‘s website at

www.iclg.co.uk. 28

Belgian Act on the Protection of Economic Competition (APEC)

consolidated on the 15th of September 2006 (Belgian Official Gazette

29/9/2006) and amended by the act of 6/5/2009 (Belgian Official Gazette

19/5/2009), available at statbel.fgov.be/en/binaries/apec-new_tcm327-

56301.pdf. 29

See Competition Bureau, Enforcement Guidelines on the Abuse of

Dominance Provisions, available at www.competitionbureau.gc.ca. 30

International Comparative Legal Guide, Telecommunications Laws and

Recommendations 2010: Canada.


http://www.globalcompetitionreview.com/

http://www.iclg.co.uk/

http://statbel.fgov.be/en/binaries/apec-new_tcm327-56301.pdf

http://statbel.fgov.be/en/binaries/apec-new_tcm327-56301.pdf

http://www.competitionbureau.gc.ca/

19



Commission by the state enforcement agency or by private parties.31

Competition law applies to the telecommunications sector.32

Czech Rep.

The only penalties available under Czech competition law are fines,

criminal sanctions for hard core cartels and order to terminate anti-

competitive behaviour.33

There is overlapping jurisdiction between the competition authority

and the telecommunications regulator in the Czech Republic.34

Denmark

While the Danish Competition Commission can issue orders to put an

end to breaches of the competition rules, it appears not to have the

express power to impose structural measures on firms that are found to

have breached Danish competition law.35

Estonia

Upon finding a violation of the competition rules, the Estonian

competition authority can issue mandatory and prohibitory injunctions

in addition to cease and desist orders and fines. However, the authority

can only make non-binding recommendations (to government, business

etc.) regarding measures that can be taken to improve competition in

the market—which would mean that it cannot impose compulsory

structural separation itself as a competition law remedy under Estonian

competition law.

Following a merger of several agencies in 2008, the activities of the

telecommunications regulator are now included within the competition

authority.36

31

OECD, Peer Review of Competition Law & Policy – Chile (2004), pp.26-27. 32

OECD, Peer Review of Competition Law & Policy – Chile (2004), pp.48-50. 33

Global Competition Review, The European Antitrust Review 2010: Czech

Republic. See also OECD, Czech Republic – Peer Review of Competition

Law & Policy (2008).

34 Note that the telecommunications sector was excluded from the ambit of

Czech competition law between 2005 and 2007; see OECD, Czech Republic

– Peer Review of Competition Law & Policy (2008).

35 International Comparative Legal Guide, Enforcement of Competition Law

2010: Denmark.


2010: Estonia.







20



Finland As a general rule, structural separation is not available under the

Finnish Competition Act. However, a special provision exists with

regard to certain electricity market concentrations.37

France

Structural measures appear to be available under French competition

law only following a merger, where, if the merged entity abuses a

dominant position that it acquired through the merger, the competition

authority can order divestitures etc.38

Germany

The Bundeskartellamt can impose any remedy that is necessary to

effectively end the breach.39

In the telecommunications sector – as far as it is regulated by the

Bundesnetzagentur within the framework of specific

telecommunications law – the Bundeskartellamt can apply only EU

competition law, and not the general domestic competition law.40

Greece

Under general Greek competition law, structural measures can be

imposed after there has been an abuse of dominance. Structural

measures can be imposed only if there is no suitable behavioural

remedy available, or if the appropriate behavioural remedy would be

more onerous than the structural solution.41

All competition issues with regards to telecommunications fall within

the remit of the sector regulator, the Hellenic Communications and

Post Commission (EETT), and so are outside the ambit of Greek

competition law. However, EU competition law applies in the sector.

37

According to the Finnish Competition Act, the Market Court in Finland may,

upon the proposal of the Finnish Competition Authority, prohibit a

concentration in the electricity market if the combined market share of the

transmission operations of the parties exceeds 25% on a national level

(concerning electricity transmitted at 400V in the transmission grid).


2010: France (Dominance). See also Global Competition Review, The

European Antitrust Review 2010: France.

39 See the Bundeskartellamt‘s website at www.bundeskartellamt.de.

40 See Bundeskartellamt‘s website at www.bundeskartellamt.de.


2010: Greece.

http://www.bundeskartellamt.de/

http://www.bundeskartellamt.de/

21



Hungary

There does not appear to be any power to impose structural separation

as a competition law remedy under Hungarian competition law.42

Iceland

Structural measures can be imposed under competition law where they

are proportionate and suitable, and provided that there is no suitable

behavioural remedy available or where the available behavioural

remedy is more burdensome than the equivalent structural remedy.43

Competition law applies in the telecommunications sector.

Ireland

Under section 14(7) of the Competition Act 2002, where an abuse of

dominance has been established by a court, one remedy available to the

court is to order a variation of the dominant position in whatever way

may be required, which could include structural separation.

Under the Communications Regulation (Amendment) Act 2007, the

telecommunications regulator, ComReg, and the Irish competition

authority have concurrent jurisdiction over competition offences in the

telecommunications sector. Thus, court proceedings leading to a civil

order to vary a dominant position in the sector can be initiated by either

agency.

Israel

Structural separation is available under Article 31 of the Restrictive

Trade Practices law for firms that have been declared to be a

monopolist in a sector. Under this provision, the Antitrust Tribunal

may, at the application of the general director of the Israeli Antitrust

Authority, order the separation of a monopoly, the separation of legal

entities and the sale of the ownership and control of such entities to

third parties.44

Italy

There is no power to order structural separation under Italian

competition law.45


42

See the Hungarian Competition Act (Act LVII of 1996), available at

www.gvh.hu. See also OECD, Hungary – Updated Report on Competition

Policy & Institutions (2004), p.12.

43 Article 16 of Law No. 44 19th May 2005 with later amendments, No 52/2007

and No 94/2008, available on the Icelandic competition authority‘s website at

www.samkeppni.is. 44

Global Competition Review, The European Antitrust Review 2010: Israel. 45

The Italian legislation on competition is available on the website of the

competition authority, AGCM, along with further information on the

authority‘s powers under competition law, at www.agcm.it. 46

See the AGCM‘s website at www.agcm.it.

http://www.gvh.hu/



http://www.samkeppni.is/

http://www.agcm.it/

http://www.agcm.it/

22



Japan

Divestiture or other forms of structural relief may be imposed by the

JFTC as a remedy for an infringement of the competition law.

Structural separation is also available as a remedy in cases where a

monopolistic situation has been found to exist under Japanese

competition law.47

Competition law applies to the telecommunications and the energy

sector.48

Korea

Following a finding of a violation of the competition rules, the

competition authority (the KFTC) can impose a corrective order and/or

a fine. Corrective orders can mandate structural remedies, including

structural separation.49

With respect to telecommunications, the sectoral regulator, the KCC,

has primary jurisdiction over regulatory matters, but the KFTC retains

residual jurisdiction over competition matters in the sector. There are

provisions in place in the relevant regulations to ensure that

undertakings are not fined twice under both sets of legislation for the

same conduct.50

Luxembourg

Structural measures are not available under national competition law—

only fines and cease and desist orders can be issued for breaches of the

competition rules.

The Luxembourg competition authority has jurisdiction over

telecommunications matters.51

Mexico

Structural remedies may be imposed by the Mexican competition

authority (CFC), but only in response to repeated competition law

violations by the same offender (i.e. not as a measure of first resort).52

47

Article 8-4 of the Act on Prohibition of Private Monopolization and

Maintenance of Fair Trade (Act No. 54 of April 14, 1947), as amended,

available on the JFTC‘s website at www.jftc.go.jp. 48

OECD, Japan – Monitoring Review of Competition Law & Policy (2004). 49

International Comparative Legal Guide, Enforcement of Competition Law

2009: Korea, and Global Competition Review, The Asia-Pacific Antitrust

Review 2010, Korea: Overview. 50

International Comparative Legal Guide, Telecommunications Law and

Regulations 2010: Korea. 51


2010: Luxembourg.

http://www.jftc.go.jp/


23




Netherlands

The NMa has the power to impose fines and to accept commitments

regarding structural changes. While under Article 58 (a) of the Dutch

Competition Act the NMa also has the power to impose structural

measures (which could include structural separation) on firms, such

power is subject to strict conditions, and could only be used as a last

resort.

Although there is a specific sectoral regulator for telecommunications,

the OPTA, the NMa‘s competition jurisdiction covers activities within

this sector as well.54

New

Zealand

There is no power under the Commerce Act 1986 (as amended) for

either the Commerce Commission or the courts to order structural

separation in response to a violation of competition law.55

Under the Telecommunications Act 2001 (amended by the

Telecommunications Amendment Act 2006) there is an express power

under telecommunications regulatory law for the relevant Minister to

impose ―robust operation separation‖ of the telecommunications

incumbent, which was implemented in March 2008.56

Norway

Under section 12 of Norway‘s Competition Act of 2004, structural

measures may be ordered to remedy a breach of the prohibition of anti-

competitive co-ordinated or unilateral behaviour, but only if there are

no suitable behavioural remedies available or if available behavioural

remedies are more onerous than the equivalent structural measures.57

52

Global Competition Review, The Handbook of Competition Enforcement

Agencies 2010, p.200. 53

Mexico‘s contribution to the Fourth Annual Latin American Competition

Forum Roundtable on Improving Relationships between Competition Policy

and Sectoral Regulation (2006), available at

www.oecd.org/competition/latinamerica. 54


2010: The Netherlands. See also the NMa‘s website at www.nmanet.nl. 55

The Commerce Act 1986 is available at www.legislation.govt.nz. 56

The Telecommunications Act 2001 is available at www.legislation.govt.nz. 57

The text of the Competition Act is available (also in English) on the website

of the Norwegian competition authority at www.konkurransetilsynet.no.

http://www.oecd.org/competition/latinamerica

http://www.nmanet.nl/

http://www.legislation.govt.nz/

http://www.legislation.govt.nz/

http://www.konkurransetilsynet.no/

24




Poland

Structural separation is not possible under current Polish competition

law (although it was available under earlier competition law).58

Portugal

According to Article 28, 1 (b) of the Portuguese Competition Act

structural measures are available if necessary to remedy a breach of the

prohibition of anti-competitive coordinated or unilateral behaviour.

Slovak Rep.

Slovak competition law provides the competition authority with the

power to order undertakings to ―remedy an unlawful state of affairs‖—

this does not, however, extend to imposing structural remedies on

parties.59

Pursuant to an amendment to the Slovak competition law in force since

June 2009, restrictions on the application of competition law in

markets also subject to specific sector regulation have been lifted.

Thus, the Slovak competition authority, the AMO, now has the power

to apply competition law in parallel with actions by sector regulators,

including the telecommunications regulator.

Slovenia

Structural separation may be imposed under Slovenian competition law

as a remedy for both anti-competitive co-ordinated and unilateral

behaviour.60


Spain

Where there is a finding of breach of the competition rules (anti-

competitive co-ordinated or unilateral conduct), the CNC has the

power to impose structural measures on the guilty undertaking(s).

58

The Act of 16 February 2007 on competition and consumer protection is

available at www.uokik.gov.pl. See OECD, The Role of Competition Policy

in Regulatory Reform – Poland (2002), p.17, for a description of the previous

legislative framework. 59

Act of 27 February 2001 on Protection of Competition and on Amendments

and Supplements to Act of the Slovak National Council No. 347/1990 Coll.

on Organization of Ministries and Other Central Bodies of State

Administration of the Slovak Republic as amended, available on the website

of the Slovak Antimonopoly Office at www.antimon.gov.sk. 60

Article 37 of the Prevention of the Restriction of Competition Act (ZPOmK-

1), available on the website of the Slovenian Competition Protection Office at

www.uvk.gov.si.

http://www.uokik.gov.pl/



http://www.antimon.gov.sk/

http://www.uvk.gov.si/

25




Sweden

There is no power to impose structural separation under Swedish

competition law—only fines and orders to terminate anti-competitive

conduct are available on a finding of breach.62

Switzerland

There is no power to impose structural measures under Swiss law—

only to fine or to order termination of the competition law violation.

Competition law applies to anti-competitive conduct in the

telecommunications sector falling outside the purview of sector

specific legislation.63

Turkey

The Turkish Competition Authority has the power to impose sanctions

in the form of fines, behavioural and structural remedies in cases where

the Turkish Competition Act has been violated.64

The Turkish Competition Act applies to all sectors within Turkey, and

so the Competition Authority has jurisdiction over anti-competitive

conduct occurring in the telecommunications sector.65

UK

The Enterprise Act 2002 gives the Competition Commission the power

to impose a wide range of remedies (including structural separation

where appropriate) if, at the conclusion of a market inquiry, there is a

finding that a feature of the market has an adverse effect on

competition. Market inquiries are undertaken by the Competition

Commission following a reference by the OFT, relevant Minister or

certain sector regulators.

Ofcom (the telecommunications regulator) can make a reference to the

Competition Commission, requesting that it conduct a sector inquiry,

which may lead to the imposition of structural remedies if a

61


2010: Spain. 62

The text of the Swedish Competition Act is available (also in English) on the

website of the Swedish Competition Authority at www.konkurrensverket.se .

See also the OECD Country Study, Sweden - The Role of Competition Policy

in Regulatory Reform (2006). 63

OECD Country Studies, Switzerland - The Role of Competition Policy in

Regulatory Reform (2005). 64

See in particular Articles 9(1), 11(1)(b), 16(3), 17(1)(a) and 27(1)(a) of the

Turkish Competition Act.

65 OECD, Turkey – Peer Review of Competition Law and Policy (2005).

http://www.konkurrensverket.se/






26



competition problem is identified. It was the prospect of this occurring

that prompted BT to voluntarily put in place functional separation in

2005.

US

US regulatory laws allow the use of various forms of structural

separation where appropriate to implement statutory non-

discrimination requirements and for other public interest purposes. In

addition, in order to remedy and prevent the recurrence of alleged

violations of the antitrust laws, including violations of §1 of the

Sherman Act (agreements in restraint of trade), §2 of the Sherman Act

(monopolization), and §7 of the Clayton Act (anticompetitive

mergers), divestiture or other forms of structural relief may be imposed

by consent decree or litigated judgment. To remedy the discrimination

and cross-subsidization alleged in the government‘s complaint against

AT&T, the 1982 AT&T consent decree required divestiture of

AT&T‘s local Bell operating company subsidiaries (BOCs), and

imposed ―equal access‖ requirements and line-of-business restrictions

on the divested BOCs (552 F. Supp. 131 (D.D.C. 1982).

The 1996 Telecommunications Act expressly retains the application of

antitrust law in the telecommunications sector. Note, however, that the

subsequent Supreme Court judgments in Trinko66

and LinkLine67

have

created some uncertainty regarding the scope of application of antitrust

in sectors already subject to ex ante telecommunications regulation, in

spite of the preservation provisions in the 1996 Act.68

66

540 U.S. 398 (2004). 67

129 S.Ct. 1109 (2009). 68

For a flavour of the debate regarding the scope of the claimed Trinko/LinkLine

exemption, see for example J.L. Rubin, ―The Truth about Trinko‖ (2005) 50(4)

The Antitrust Bulletin 725; N. Economides, ―Vertical Leverage and the Sacrifice

Principle: Why the Supreme Court Got Trinko Wrong‖ (2005) 61 NYU Annual

Survey of American Law 379; J.G. Sidak, ―Abolishing the Price Squeeze as a

Theory of Antitrust Liability‖ (2008) 4(2) Journal of Competition Law &

Economics 279; E.N. Hovenkamp & H. Hovenkamp, ―The Viability of Antitrust

Price Squeeze Claims‖ (2009) 51 Arizona Law Review 273; S.L. Dogan & M.A.

Lemley, ―Antitrust Law and Regulatory Gaming‖ (2009) 87(4) 685 Meriwether,

―Putting the ―Squeeze‖ on Refusal to Deal Cases: Lessons from Trinko and

linkLine‖ (2010) 24 Antitrust 65; C.Cavaleri Rudaz, ―Did Trinko Really Kill

Antitrust Price Squeeze Claims? A Critical Approach to the LinkLine Decision

Through a Comparison of E.U. and U.S. Case Law‖ (2010) 43 Vanderbilt

Journal of Transnational Law 1077 and A. Heimler, ―Is a Margin Squeeze an

Antitrust or a Regulatory Violation?‖ (2010) 6(4) Journal of Competition Law

& Economics 879.

27



European

Union

Under Article 7 of Regulation 1/2003, there is an explicit power to

impose structural remedies where there has been a finding of breach of

the EU competition rules. This is subject to several limitations, inter

alia that the remedy must be proportionate to the breach committed,

and structural remedies can only be imposed either where there is no

equally effective behavioural remedy or where any equally effective

behavioural remedy would be more burdensome for the undertaking

concerned than the structural remedy.69

Structural remedies in the form

of binding undertakings, given by a firm voluntarily in order to bring

an investigation to an end without a finding of breach, can also be

accepted under Article 9 of Regulation 1/2003, and this latter power is

not subject to the same limitations as remedies imposed under Article

7.70

EU competition rules apply in all sectors to conduct having an effect

on trade between EU Member States, including the energy and

telecommunications sector, regardless of the concurrent presence of

national or EU sector-specific regulation.

3. Developments in gas

The following section of this report provides a non-exhaustive overview of

developments with respect to structural and behavioural separation in the gas

sector in OECD Member countries and the EU. While the focus of the

Recommendation is on structural separation, experiences with behavioural

separation such as accounting or functional separation are included as well. In

order to focus on the most significant developments, not all countries are listed

3.1 Gas sector in Chile

The development of the natural gas market in Chile has taken place on a

regionalised basis, with separate gas transmission systems and distribution

networks operating across the regions. It is necessary to obtain a government

concession in order to build either a transmission pipeline or a distribution

network, which requires the concessionaire to adhere to certain service

69

See also recital 12 of Council Regulation (EC) No 1/2003 of 16 December

2002 on the implementation of the rules on competition laid down in Articles

81 and 82 of the Treaty.

70 See the Court of Justice‘s decision in C-441/07 P European Commission v

Alrosa (Judgment of 29 June 2010) for a discussion of the distinction

between the Commission‘s powers under Article 7 and Article 9 of

Regulation 1/2003.

28


conditions. In particular, transmission operators are required to grant open

access to their pipelines to distribution companies on non-discriminatory terms,

while distribution operators are obliged to provide universal service to

customers within their catchment areas. While there is no price regulation

within the Chilean gas sector, instead the competition authority has jurisdiction

over anti-competitive practices that may occur in the sector.71

3.2 Gas sector in Estonia

The Estonian market for natural gas is relatively small, isolated and highly

concentrated.72

Currently, the formerly State-owned gas company, Eesti Gaas,

has an effective monopoly on both gas transmission and supply in Estonia.73

A

separate transmission division, AS EG Võrguteenus, began operations from 1

January 2006 in order to comply with Estonia‘s requirements under EU law.74

Due to the continuing lack of competition in the natural gas sector, however,

full ownership unbundling of Eesti Gaas has been proposed by the government.

The plan would see Eesti Gaas separated into two distinct companies with

respect to its trading and transmission activities.75

3.3 Gas sector in the European Union

Structural separation within the EU gas sector has been pursued under a

two-pronged strategy which utilises both ex ante regulatory measures and ex

post competition law enforcement.

3.3.1 Energy sector inquiry

Energy reforms in the EU began in the late 1990s, with the adoption of the

first liberalisation directive for electricity in 1996,76

and gas in 1998.77

The

71

International Comparative Legal Guide, Gas Regulation 2010, Chapter 9:

Chile.

72 Herbert Smith, European Energy Review 2010: Estonia, available at

www.herbertsmith.com, p.40.

73 Herbert Smith – Estonia, cited fn. 72 above, p.41.

74 See the company information on Eesti Gaas‘s website at www.gaas.ee.

75 See Baltic Reports, ―Estonia to reform gas sector‖, published 29 July 2010,

and Baltic Reports, ―Eesti Gaas lambastes government break-up proposal‖,

published 30 July 2010, available at www.balticreports.com.

76 Directive 96/92/EC of the European Parliament and of the Council of 19

December 1996 concerning common rules for the internal market in

electricity (OJ L 27/20, 30.1.1997), hereafter the ―First Electricity Directive‖.

http://www.herbertsmith.com/

http://www.gaas.ee/

http://www.balticreports.com/

29


second liberalisation directives for both sectors were adopted in 2003,78

deepening the reform process for electricity and gas. Nevertheless, by 2005 the

European Commission was of the view that the energy markets in some EU

Member States were ―open only on paper‖,79

and so it initiated an inquiry in the

energy sector, in order to ascertain the underlying reasons why the market did

not fully function in the sector.80

The Final Report of the energy inquiry, published on 10 January 2007,81

found that, in Member States in which liberalisation efforts have been

introduced successfully, consumers have benefitted in the form of the widest

choice of suppliers and services, as well as more cost-reflective prices on

average.82

Throughout the Common Market taken as a whole, however,

significant competition problems and barriers to the creation of single markets

in gas and electricity remain. These include: a high level of concentration in

both sectors; insufficient unbundling leading to vertical foreclosure; and a lack

of cross-borders sales due to insufficient gas import pipeline capacity and

electricity interconnector capacity combined with inadequate incentives among

77

Directive 98/30/EC of the European Parliament and of the Council of 22 June

1998 concerning common rules for the internal market in natural gas (OJ L

204/1, 21.7.1998), hereafter the ―First Gas Directive‖.


June 2003 concerning common rules for the internal market in natural gas

and repealing Directive 98/30/EC (OJ L 176/57, 15.7.2003), hereafter the

―Second Gas Directive‖, and Directive 2003/54/EC of the European

Parliament and of the Council of 26 June 2003 concerning common rules for

the internal market in electricity and repealing Directive 96/92/EC (OJ L

176/37, 15.7.2003), hereafter the ―Second Electricity Directive‖.

79 European Commission, Working together for growth and jobs – A new start

for the Lisbon Strategy COM(2005) 24, published 2 February 2005, p.8.

80 Commission Decision of 13 June 2005 initiating an inquiry into the gas and

electricity sectors pursuant to Article 17 of Council Regulation (EC) No

1/2003in Cases COMP/B-1/39.172 (electricity) and 39.173 (gas).

81 European Commission, Inquiry pursuant to Article 17 of Regulation (EC) No

1/2003 into the European gas and Electricity sectors (Final Report)

COM(2006) 851, published 10 January 2007, hereafter the ―Energy Inquiry

Report‖. See also Neelie Kroes, ―Improving Competition in European

Energy Markets through Effective Unbundling‖ (2008) 31 Fordham Journal

of International Law 1387.

82 Energy Inquiry Report, cited fn. 81 above, p.2.

30


incumbents to expand existing capacity.83

The Report outlined a bilateral

approach to addressing market problems within the energy sector, combining

further regulatory measures with competition law enforcement.84

3.3.2 Regulatory measures—third liberalisation package

Concurrently with publication of the Final Report on the energy inquiry,

the Commission issued its proposals for regulatory reforms of the EU energy

markets.85

In these proposals, the Commission argued that, ―[i]nherently, legal

unbundling does not suppress the conflict of interest that stems from vertical

integration, with the risk that networks are seen as strategic assets serving the

commercial interest of the integrated entity, not the overall interest of network

customers.‖86

The evidence collected by the Commission indicated that the lack

of full unbundling had created various problems in the Member States:

Non-discriminatory access to information could not be guaranteed;

The existing unbundling rules did not remove the incentives for

discrimination with respect to third party access; and

Investment incentives were distorted.87

The Commission concluded that ―only strong unbundling provisions would

be able to provide the right incentives for system operators to operate and

83

Energy Inquiry Report, cited fn. 81 above, pp.5-9. Other markets problems

include a lack of transparency on the markets, particularly with regard to

price formation; limited competition at the retail level; balancing markets that

favour incumbents and thus create barriers to entry; and the need to develop

the liquefied natural gas (LNG) sector.

84 Energy Inquiry Report, cited fn. 81 above, p.9.

85 European Commission, Communication from the Commission to the Council

and the European Parliament. Prospects for the Internal Gas and Electricity

Market COM(2006) 841, published on 10 January 2007.

86 Prospects for the Internal Gas and Electricity Market, cited fn. 85 above,

p.10.


p.10-11.

31


develop the network in the interest of all users.‖88

Two options for further

transmission system operator (TSO) unbundling were foreseen:

Fully (ownership) unbundled TSO, whereby the TSO would both own

the transmission assets and operate the network. It would be

independently owned, meaning that supply/generation companies

could no longer hold a significant stake in the TSO; and/or

Separate system operators without ownership unbundling, whereby

system operation would be separated from ownership of the assets.

Supply/generation companies could no longer hold a significant stake

in the independent system operators (ISOs), but ownership of the

transmission assets could remain within a vertically integrated

group.89

The Commission expressed its preference for the first option—full

ownership unbundling—over the ISO model in the following terms:

Economic evidence shows that ownership unbundling is the most

effective means to ensure choice for energy users and encourage

investment. This is because separate network companies are not

influenced by overlapping supply/generation interests as regards

investment decisions. It also avoids overly detailed and complex

regulation and disproportionate administrative burdens.

The independent system operator approach would improve the status

quo but would require more detailed, prescriptive and costly

regulation and would be less effective in addressing the disincentives

to invest in networks.90

Both of the options presented by the Commission proved too intrusive for

some Member States, however, although the Commission‘s approach was

strongly supported by others.91

In July 2009, the Parliament and Council

88

Prospects for the Internal Gas and Electricity Market, cited fn. 85 above,

p.11.


p.11.


p.12.

91 See R. Boscheck, ―The EU‘s Third Internal Energy Market Legislative

Package: Victory of Politics over Economic Rationality‖ (2009) 32(4) World

32


adopted an unbundling programme for both the gas92

and electricity93

sectors

which allows a Member State to adopt any of three potential unbundling

models: ownership unbundling, an ISO model and an independent transmission

operator (ITO) model.94

Member States are required to transpose and bring into

force the unbundling provisions of the Third Gas and Electricity Directives by 3

March 2011.

Under ownership unbundling, the owner of a gas or electricity transmission

system is required to act as the TSO,95

being the natural or legal person with

responsibility for operation, maintenance and development of a transmission

system, plus its interconnections with other systems, as well as ensuring the

long-term ability of the system to meet reasonable demand for the transmission

of gas and electricity respectively.96

Under this model, the same person is not

permitted, directly or indirectly, to exercise control over both the TSO and an

undertaking performing any of the functions of generation or supply (or

exercise control over one party and any right over the other).97

The concept of a

right includes a majority shareholding in either the TSO or the undertaking

performing generation or supply function,98

so that this model requires, in

Competition 593 for a discussion of some of the political issues surrounding

the adoption of the Third Liberalisation Package.


July 2009 concerning common rules for the internal market in natural gas and

repealing Directive 2003/55/EC (OJ L 211/94, 14.8.2009), hereafter the

―Third Gas Directive‖.


July 2009 concerning common rules for the internal market in electricity and

repealing Directive 2003/54/EC (OJ L 211/55, 14.8.2009), hereafter the

―Third Electricity Directive‖.

94 See European Commission Staff Working Paper, Interpretative Note on

Directive 2009/72/EC concerning common rules for the internal market in

electricity and Directive 2009/73/EC concerning common rules for the

internal market in natural gas: The Unbundling Regime, published 22

January 2010, for a more detailed account of the Commission‘s interpretation

of these provisions.

95 Article 9(1)(a) of both the Third Gas and Electricity Directives.

96 Article 2(4) of the Third Gas and Electricity Directives.

97 Article 9(b)(i)&(ii) of the Third Gas and Electricity Directives.

98 Article 9(2)(c) of the Third Gas and Electricity Directives.

33


essence, majority ownership unbundling of any vertically integrated gas or

electricity firm.

The ISO model may be applied by a Member State where a transmission

system belonged to a vertically integrated gas99

or electricity100

company on 3

September 2009. In this case, the owner of the transmission system proposes a

candidate ISO, which must be entirely separate from the vertically integrated

utility company. The proposed ISO must be approved and designated by the

Member State, and any such designation is subject to approval by the

Commission.101

The ISO takes responsibility for operation, maintenance,

development and long-term investment planning for the transmission system, as

well as responsibility for granting and managing third-party access including

collection of payments.102

Where an ISO is appointed, legal and functional

unbundling is mandated for the transmission system owner.103

The ITO model may alternatively be applied by a Member State where a

transmission system belonged to a vertically integrated gas or electricity

company on 3 September 2009.104

Under this approach, an ITO is established,

which, although it remains part of the vertically integrated company, must be

autonomous and have, inter alia, its own personnel.105

The ITO has

responsibility for, amongst other tasks, the operation, maintenance and

development of the transmission system; investment planning; the granting of

third-party access on non-discriminatory terms; and the collection of all

transmission system related charges.106

While the model requires the

introduction of safeguards to ensure that the transmission and supply functions

are performed separately, the ITO continues to be a part of the vertically

integrated gas or electricity firm. The ITO model can therefore be distinguished

from the ISO model: while under both models the transmission assets remain

99

Article 14(1) of the Third Gas Directive.

100 Article 13(1) of the Third Electricity Directive.

101 Article 14(1) of the Third Gas Directive and Article 13(1) of the Third

Electricity Directive.

102 Article 14(4) of the Third Gas Directive and Article 13(4) of the Third

Electricity Directive.

103 Article 15(1)&(2) of the Third Gas Directive and Article 14(1)&(2) of the

Third Electricity Directive.

104 Articles 9(8)(b) and Chapter V of the Third Gas and Electricity Directives.

105 Article 19 of the Third Gas and Electricity Directives.

106 Article 17(2) of the Third Gas and Electricity Directives.

34


part of the vertically integrated company, under the ITO model the service

operations functions also remain within the vertically integrated utility, whereas

under the ISO model these functions are performed by an entirely independent

entity.

Common Article 26 of the Third Gas and Electricity Directives contains

provisions relating to the unbundling regime for distribution system operators,

which remain substantially unchanged from the preceding regime. Notably, the

Third Gas Directive contains an exemption from the regulatory regime for a

defined period of time for ―major new gas infrastructure‖ (defined as

interconnectors, LNG and storage facilities) which fulfils various criteria: the

investment enhances competition in gas supply and security of supply; the level

of risk attached to the investment in such that the investment would not take

place unless an exemption is granted; if built by a vertically integrated firm,

legal separation must be in place; charges must be levied on infrastructure users;

and the exemption cannot be detrimental to competition or the effective

functioning of the internal market in natural gas, or the efficient functioning of

the regulated system to which the infrastructure in connected.107

No equivalent

provision for regulatory holidays is contained in the Third Electricity Directive.

It must be borne in mind that, when both of the Third Energy

Directives have been fully transposed into domestic law by the Member States,

this is likely to have a significant impact on the structure of the electricity and

gas markets in many of the countries concerned. Therefore, consideration of

existing markets structures should take into account likely future developments

prompted by the EU framework.

3.3.3 Antitrust enforcement

The Commission‘s dual strategy for the development of integrated,

competitive pan-EU markets in gas and electricity depends equally on the

enforcement of EU competition law provisions against instances of anti-

competitive behaviour in these markets. The use of competition law and

regulatory policy as a combined instrument in the EU energy sector has differed

significantly from their application in other network industries: while in other

sectors, for example telecommunications, antitrust enforcement kick-started the

liberalisation process and was followed by ex ante regulation, in the energy

107

Article 36 of the Third Gas Directive. See M. Szydło, ―Regulatory

Exemptions for New Gas Infrastructure. A Key Challenge for European

Energy policy‖ (October 2009) European Energy and Environmental Law

Review 254 for a more detailed discussion of the exemption provisions.

35


sector the process began with the liberalisation Directives, which have been

supplemented subsequently with antitrust enforcement actions.108

Use of the Commission‘s recently introduced formal commitment decision

procedure109

has been prominent in its energy sector cases. This mechanism

allows the Commission to accept undertakings from firms under investigation to

the effect that they will adopt structural or behavioural changes to modify

alleged anti-competitive restraints going forward, in lieu of a finding of

infringement of the competition rules.110

The following section outlines briefly a number of Commission cases in

which structural separation issues have arisen, in both merger practice and

competition law enforcement. Although the remedies in these cases were

considered structural by the European Commission, they were not of an

―unbundling‖ nature. The RWE Gas Foreclosure and ENI commitment

decisions, where unbundling types of structural remedies were applied are

summarised in greater detail subsequently.111

In the Distrigaz decision, which concerned the dominant supplier of

natural gas for industrial use in Belgium, the Commission accepted

commitments from Distrigaz to modify its long term supply contracts

so as to reduce the extent to which industrial customers are tied to

Distrigaz for long periods, thereby aiding the liberalisation of the

Belgian gas market.112

108

L. Hancher & A. de Hauteclocque, Manufacturing the EU Energy Market:

the Current Dynamics of Regulatory Practice, EUI Working Paper RSCAS

2010/01, published January 2010, p.2.

109 Introduced by Article 9 of Regulation (EC) 1/2003.

110 See S. Rab, D. Monnoyeur & A. Suktankar, ―Commitments in EU

Competition Cases: Article 9 of Regulation 1/2003, its Application and the

Challenges Ahead‖ (2010) 1(3) Journal of European Competition Law &

Practice 171-188 for further discussion of the commitment decision

procedure.

111 See U. Scholz & S. Purps, ―The Application of EC Competition Law in the

Energy Sector‖ (2010) 1(1) Journal of European Competition Law &

Practice 37-51 for additional discussion of competition cases in the

electricity and gas sectors.

112 Commission Decision of 11 October 2007 in Case COMP/B-1/37966 –

Distrigaz.

36


In the E.ON gas foreclosure decision, the Commission accepted

commitments from E.ON, an integrated dominant player in the gas

transmission and downstream supply markets in Germany, to release

large capacity volumes at the entry points to its gas networks.113

In the Gaz de France/Suez merger in 2006 between two energy

companies both active mainly in France and Belgium, one of the

remedies proposed by the parties and accepted by the Commission

was the relinquishing of control over Fluxys, the operator of the

natural gas transmission grid and storage infrastructure in Belgium.114

E.ON/MOL: In order to gain approval for its acquisition of the storage

and wholesale & trading divisions of MOL, the incumbent oil and gas

company in Hungary, E.ON offered, inter alia, to accomplish full

ownership unbundling of gas production and transmission activities,

which were to be retained by MOL, from gas wholesale and storage

activities, which were acquired by E.ON.115

The Commission, taking

the view that ―the ownership unbundling and the gas and contract

release offered as remedies in the E.ON/MOL case are good examples

of efficient ways to support the development of competition in a

number of energy markets in Europe‖,116

approved the merger in

December 2005. Hungary now has one gas TSO, FGSZ Zrt., which is

a fully owned but legally unbundled subsidiary of MOL. This current

113

See European Commission, Notice published pursuant to Article 27(4) of

Council Regulation (EC) No 1/2003 in Case COMP/B-1/39.317 – E.ON gas

(OJ C 16/42, 22.1.2010) and European Commission press release, IP/10/494

Antitrust: E.ON‘s commitments open up German gas markets to competitors,

published 4 May 2010.

114 See European Commission press release, IP/06/1558 Mergers: Commission

approves merger of Gaz de France and Suez, subject to conditions, published

14 November 2006.

115 See European Commission press release, IP/05/1658 Mergers: Commission

approves acquisition by E.ON of MOL‘s gas business, subject to conditions,

published 21 December 2005.

116 See European Commission memo, MEMO/05/492 Mergers: Commission‘s

conditional approval of E.ON‘s acquisition of MOL‘s gas business –

frequently asked questions, published 21 December 2005.

37


structure complies almost entirely with the requirements of the

independent transmission operator model.117

3.3.4 RWE Gas Foreclosure

In the RWE Gas Foreclosure commitment decision,118

the Commission

addressed alleged anti-competitive behaviour in the German gas transmission

markets. RWE AG is a Germany-based energy and utility company. Prior to the

decision, RWE‘s gas sector operations were fully integrated, with activities in

the production and import of gas, in gas transmission and storage and in

downstream gas distribution. The Commission on 15 October 2008 adopted a

preliminary assessment in which it asserted that RWE may have abused its

dominant position on the transmission market in Western Germany, contrary to

Article 102 TFEU (ex Article 82 EC) through two forms of anti-competitive

behaviour:

Refusal to supply access to RWE‘s gas transmission network, by

understating the capacity on its network available for third customers,

and by managing existing capacity in an inefficient manner so as to

further exclude third parties, and

Margin squeeze, charging artificially high prices for access to its

transmission network, coupled with asymmetric network tariffs

(including rebates and balancing fees) which further raised costs for

its downstream competitors compared with the prices paid by RWE‘s

own gas supply subsidiary.

Although RWE did not accept the contentions set out in the preliminary

assessment, it offered a number of commitments in order to address the

Commission‘s competition concerns, which would result essentially in the

divestment of its entire Western German high-pressure gas transmission

network:

1. RWE will divest its current German gas transmission system

business to a suitable purchaser which must not raise

prima facie competition concerns. RWE notably committed to

divest:

117

See Herbert Smith, European Energy Review 2010: Hungary, available at

www.herbertsmith.com.

118 Commission Decision of 18 March 2009 in Case COMP/39.402 – RWE Gas

Foreclosure.


38


a) RWE's German high-pressure gas transmission

network, with a total length of approx. 4 000 km. This

corresponds to RWE's entire current German high-

pressure gas transmission network, with the exception

of some network parts in the area of Bergheim (length:

approx. 100 km). For parts of the network which are

currently not exclusively owned by RWE but co-owned

with other parties, RWE commits to divest its entire

share;

b) auxiliary equipment necessary for the operation of the

transmission network (such as the gas conditioning

facilities in Broichweiden and Hamborn, a dispatching

centre [Prozessleitsystem] etc.);

c) intangible assets necessary for the operation of the

transmission network (such as software for the

dispatching centre, contracts and licenses);

2. RWE also commits to supply the purchaser for a limited

period of up to five gas years following the closing of the

divestiture with auxiliary services necessary for the operation

of the transmission network, such as the provision of gas

flexibility services.

3. The business will be endowed with personnel and key

personnel necessary for the operation of the transmission

network.119

Following a market testing process by the Commission,120

RWE offered

revised commitments on 2 February 2009, which inter alia made explicit

RWE‘s obligations to co-operate with other network operators and to continue

the process of further market integration. The final commitments were made

binding on RWE on 18 March 2009, at which point the infringement case

against the company was brought to an end without any finding of violation of

the competition rules.

119

RWE Gas Foreclosure, paragraph 38. The original commitment text and

schedules are contained in the German version of the decision.

120 Under Article 27(4) of Regulation 1/2003, the Commission is required to

―market test‖ proposed commitments prior to acceptance: it publishes a

summary of the proposed commitments in the Official Journal, so that

interested third parties may submit their observations on the proposals.

39


RWE sold its network to an approved buyer under the supervision of a

trustee. The network could only be divested to purchasers that do not give rise

to prima facie competition concerns.121

3.3.5 ENI case

The Commission has also concluded a commitment procedure with ENI

SpA, an Italian multinational energy company.122

Having taken the view that

ENI is a dominant player on the markets(s) for the transport of natural gas to

and into Italy as well as on the downstream gas markets for the supply of gas,

the Commission on 6 March 2009 issued a formal Statement of Objections (SO)

to the company. In the SO, the Commission outlined its preliminary view that

ENI may have abused its dominant position, in breach of Article 102 TFEU, by

refusing to supply transportation capacity on its natural gas pipelines. Three

types of possible anti-competitive behaviour, in particular, were identified:

Capacity hoarding: a refusal to grant access to capacity available on

ENI‘s transport network;

Capacity degradation: an offer of capacity in a less useful manner;

and

Strategic underinvestment: strategic limitation of investment in ENI‘s

international transmission pipeline system.123

ENI did not accept the Commission‘s position as set out in the Statement

of Objections. Nevertheless, subsequent to a hearing that took place at the end

of 2009, it offered various commitments to the Commission in order to address

its competition concerns. Specifically, ENI offered to divest its international gas

transmission system businesses in Germany (the TENP pipeline), Switzerland

121

See European Commission press release IP/09/410 Antitrust: Commission

opens German gas market to competition by accepting commitments from

RWE to divest transmission network, published on 18 March 2009.

122 Commission Decision of 29 September 2010 relating to a proceeding under

Article 102 of the Treaty on the Functioning of the European Union and

Article 54 of the EEA Agreement (Case COMP/39.315 – ENI). An

informative discussion of the case is available in F. Maier-Rigaud, F. Manca

& U. von Koppenfels ―Strategic Underinvestment and Gas Network

Foreclosure – the ENI case‖, EU Competition Policy Newsletter, Issue 1,

2011.

123 ENI commitment decision, paragraphs 39-60.

40


(the Transitgas pipeline) and Austria (the TAG pipeline). While the German and

Swiss pipelines are each to be sold to a suitable purchaser that does not raise

prima face competition concerns, the Austrian pipeline, through which 30% of

the natural gas used in Italy is transported from Russia, is to be sold to an Italian

State entity. ENI also committed to supplying the purchasers of these pipelines

with the auxiliary services necessary for the operation of the transmission

network for a limited period following the closing of the divestiture, plus to

endow the businesses with the personnel necessary for the operation of the

transmission network.

The Commission issued a market test notice on 5 March 2010, seeking

comments on the proposed commitments.124

On 29 September 2010, the

Commission accepted and made legally binding the commitments offered to it

by ENI, thus bringing to an end the infringement proceedings without any

finding of breach.125

3.4 Gas sector in Greece

On 27 December 2005, the Law for the Liberalisation of the Gas Market

came into force, which resulted in the unbundling of the gas transmission

system in Greece. A new company, DESFA SA, was established to act as owner

and operator of the gas transmission system.126

DESFA is a wholly owned

subsidiary of DEPA SA, the vertically integrated public gas company.127

Under

the 2005 Law, however, the Board of Directors of DESFA SA is appointed by

the State rather than by DEPA SA.

The medium and low pressure gas distribution networks are owned and

operated by three regional monopoly companies—EPA Thessalonikis SA, EPA

Thessalias SA and EPA Attikis SA—that act as network operators and single

suppliers in their respective regions. For these areas, as well as for three other

regions where new distribution and supply companies are to be established by

124

European Commission, Notice published pursuant to Article 27(4) of Council

Regulation (EC) No 1/2003 in Case COMP/B-1/39.315 – ENI (OJ C 55/13,

5.3.2010).

125 See European Commission press release IP/10/1197 Antitrust / ENI case:

Commission opens up access to Italy's natural gas market, published on 29

September 2010.

126 Further information on DESFA SA is available on its website at

www.desfa.gr.

127 Further information on DEPA SA is available on its website at www.depa.gr.

http://www.desfa.gr/

http://www.depa.gr/

41


2012, Greece requested and has been granted a limited derogation from EU law

requirements relating to the liberalisation of the gas sector.

Current legislative proposals for the implementation of the Third Energy

Package in the gas sector in Greece foresee the adoption of the ITO model for

the gas transmission operator DESFA SA.

3.5 Gas sector in Ireland

On 4 July 2008, the transmission system and distribution system assets of

Bord Gáis Éireann (BGÉ), the vertically integrated State-owned gas company in

Ireland, were transferred to Gaslink, an independent subsidiary of BGÉ. Gaslink

is the combined transmission and distribution systems operator for the national

gas network, while BGÉ remains the asset owner and gets a reasonable return

on its investment. This structural change came about in order to comply with

the requirements of the Second Gas Directive.128

Under the unbundling regime, BGÉ has been separated into several

components. Bord Gáis Energy is the gas supply unit, providing gas to

industrial, commercial and residential customers. Bord Gáis Networks (BGN) is

the regulated systems owner. Gaslink contracts with BGN to perform a number

of functions on Gaslink‘s behalf related to construction, operation and

maintenance of the gas distribution and transmission systems in Ireland. Bord

Gáis Energy and BGN are separate and distinct business units within BGÉ that

are ring-fenced through their respective licences issued by the regulatory body,

the Commission for Energy Regulation (CER).

Competition in the retail gas market in Ireland for industrial and

commercial customers has been in place since 2004, and there are now three

suppliers active in this segment. Full market opening in the Irish natural gas

market took place on 1 July 2007. All gas customers are now eligible to switch

supplier, including residential customers, although this sector is still in the

process of development. All retail gas suppliers must be licensed by CER.129

128

Directive 2002/55/EC, transposed into Irish law by S.I. No. 760 of 2005

European Communities (Internal Market in Natural Gas) (BGÉ) Regulations

2005.

129 The material in this section is taken from the website of the Commission for

Energy Regulation, available at www.cer.ie. Further information is also

available on Bord Gáis‘ website, available at www.bordgais.ie.

http://www.cer.ie/

http://www.bordgais.ie/

42


3.6 Gas sector in Israel130

The on-going development of the natural gas sector in Israel has taken

place along largely unbundled lines. A State-owned company, Israel Natural

Gas Lines Ltd. (INGL), has been established in order to construct and operate

the high pressure gas transmission system. The INGL grid operates as an open

access system and is intended to transport gas to large customers and to

distribution systems. INGL is not permitted to engage in the sale of gas except

for operational needs.

Two upstream pipelines deliver gas to the INGL grid, although it is

anticipated that a third pipeline will be constructed in order to transport gas

from offshore. Both of the existing upstream pipelines have been constructed

and are operated by the owners of the gas.

Low pressure regional distribution systems are to be constructed by private

sector (non-governmental) companies, who must obtain licences to do so

through a tendering process. Licences have been granted through such process

for two of the contemplated distribution regions. The regional distribution

systems will also operate on an open access basis, and are intended to transport

gas from the INGL grid to customers and marketing companies.

3.7 Gas sector in Portugal

Unbundling of the Portuguese gas market began in 2006, in order to

comply with the requirements of the Second Gas Directive. The principle

legislation involved was Decree-Law no. 30/2006, of February 15 2006, and

Decree-Law no. 140/2006 of July 26 2006. Pursuant to these provisions, the

national natural gas system is divided into seven major segments: reception,

storage and re-gasification of LNG; underground storage; transportation of

natural gas; distribution of natural gas; supply of natural gas; operation of the

natural gas market; and logistic operations for switching suppliers of natural

gas.

Under the new regime, natural gas transmission activity is legally

unbundled from other activities within the gas system. The independent

operator of the gas transmission system, Redes Energéticas Nacionais (―REN‖),

130

This information is taken from International Comparative Legal Guide, Gas

Regulation 2010, Chapter 15: Israel, The International Comparative Legal

Guide to Gas Regulation 2010, available at www.iclg.co.uk. See also the

natural gas section of the website of the Ministry of National Infrastructures

of Israel at www.mni.gov.il/mni/en-US/Gas.


http://www.mni.gov.il/mni/en-US/Gas

43


through its subsidiary REN Gasodutos, holds an exclusive 40-year concession

granted by the Portuguese government. Other companies in the REN group

operate in other segments of the natural gas market, including underground

storage, and reception, storage and re-gasification of LNG. REN Gasodutos is

subject to a regulatory obligation to grant access to the transmission network on

a non-discriminatory basis, while access tariffs are determined by the regulatory

agency, Entidade Reguladora dos Serviços Energéticos (ERSE).

Legal separation has also been introduced with respect to natural gas

distribution activities. Distribution is carried out through concessions or licenses

granted by the Portuguese government. The entities operating the distribution grid

at the date of enactment of Decree-Law no. 30/2006 maintained their right to

operate the grid as concessionaires or licensed entities under an exclusive

territorial public service regime. As with the transmission system operator,

distribution companies are under a regulatory obligation to grant access to the

distribution grid under non-discriminatory terms, with access tariffs being set by

ERSE.131

3.8 Gas sector in the Netherlands

On 7 June 2007, the Unbundling Act132

came into effect in the

Netherlands, requiring full ownership unbundling of vertically integrated energy

companies. Under this legislation, companies carrying out network activities in

the Netherlands are not permitted to be part of the same group as companies

carrying out production, trading and/or supply activities. Furthermore, network

companies are not allowed to hold any shares, directly or indirectly, in

production, trading and/or supply companies, and vice versa. The Act directs

that unbundling must be completed by 1 January 2011.133

131

See Herbert Smith, European Energy Review 2010: Portugal, available at

www.herbertsmith.com, as well as the website of the EDP Group, available

at www.edp.pt, and the REN Group, available at www.ren.pt. See also

International Comparative Legal Guide, Gas Regulation 2010, Chapter 28:

Portugal, available at www.iclg.co.uk.

132 Amendment to the Electricity Act 1998 and Gas Act in connection with

further rules concerning Independent Network Management, or Splitsingswet.

See L. Bouchez & B. de Man, ―Recent developments in the Netherlands

energy market‖ FW International M&A Review 2007, p.24.

133 See Herbert Smith, European Energy Review 2010: The Netherlands,

available at www.herbertsmith.com, and International Comparative Legal

Guide, Gas Regulation 2010, Chapter 21: The Netherland, available at

www.iclg.co.uk.


http://www.edp.pt/

http://www.ren.pt/




44


The two largest Dutch utility companies, Essent NV and Nuon NV, have

both already unbundled their production and supply arms from their network

divisions. Essent sold off its production and supply operations to RWE AG of

Germany, while Nuon sold its operations to Vattenfall AB of Sweden. The

network arms of both Essent and Nuon were spun off and remain in public

hands.134

Concurrently, the Unbundling Act was challenged before the Court of

Appeal of The Hague, by three vertically integrated Dutch public utility

companies, Eneco, Essent and Delta. By decision of 22 June 2010, the Court of

Appeal took the view that the rule prohibiting network operators from

remaining part of the same company group as an entity involved in production,

trading or supply of energy constituted an obstacle to the free movement of

capital, contrary to Article 63 TFEU. Accordingly, the provisions concerned

were declared to be inapplicable.135

The Dutch government has announced its

plans to appeal the ruling to the Supreme Court of the Netherlands.136

3.9 Gas sector in Poland

In Poland, structural separation of the gas market began in 2004, when gas

transmission was legally unbundled from other activities of the State-controlled

natural gas incumbent company, Grupa Kapitalowa Polskie Górnictwo Naftowe

i Gazownictwo S.A (PGNiG), with the establishment of the gas transmission

operator, Gaz-System S.A. In 2005, ownership of Gaz-System passed to the

State Treasury, thereby effecting full ownership unbundling of the gas TSO in

Poland.137

In 2007, legal unbundling of the gas distribution sector in Poland took

place. Under the Energy Law, PGNiG was required to separate trade activities

134

See Reuters, ―Court says Dutch Utility Unbundling Breaks EU law‖,

published 22 June 2010, and Bloomberg Businessweek, ―Dutch Court says

Unbundling Conflicts with EU Law‖, published 22 June 2010.

135 See cases Hof Gravenhage, 22 June 2010, rolnr. HA ZA 07-2538 Delta

N.V/De Staat der Nederlanden; Hof Gravenhage, 22 June 2010, rolnr. HA

ZA 07-3089 Eneco Holding N.V./De Staat der Nederlanden; Hof

Gravenhage, 22 June 2010, rolnr. HA ZA 08-756 Essent N.V. & Essent

Nederland B.V./De Staat der Nederlanden.

136 See press articles cited at fn. 134 above.

137 See Gaz-System‘s website, at www.gaz-system.pl, and International

Comparative Legal Guide, Gas Regulation 2010, Chapter 27: Poland,

available at www.iclg.co.uk.

http://www.gaz-system.pl/


45


from technical distribution activities, creating six new companies in the

distribution sector (DSOs) and six new companies in the retail trade sector. As

PGNiG has retained ownership of these companies, as well as its gas and oil

production operations, full ownership unbundling of the distribution sector has

not yet taken place.138

3.10 Gas sector in Slovenia

The liberalisation of the gas sector in Slovenia is at a relatively advanced

stage.139

The natural gas transmission network is owned and operated by a

single entity, Geoplin, d.o.o., which is also active in the gas trading market.

Nevertheless, there is full legal and functional unbundling of the two wholly-

owned subsidiary companies that comprise the Geoplin group, namely Geoplin

plinovodi, d.o.o., which is the transmission system operator, and Geocom,

d.o.o., whose main activity is natural gas trading.140

Natural gas distribution in Slovenia is organised on a regional basis,

according to which gas distribution system operators (DSOs) operate the

distribution networks of individual local communities. As each gas DSOs in

Slovenia supplies fewer than 100,000 customers, accounting separation rather

than functional separation is required for these companies.141

Together, the 18

DSOs are connected to a network comprising approximately 125,000 final

customers in 71 local communities.

3.11 Gas sector in Turkey

The Natural Gas Market Law (No.4646, adopted on 18 April 2001,

hereafter NGML) seeks to liberalise and vertically separate the natural gas

market in Turkey. Currently, gas transmission is carried out by the State-owned

transport company, BOTAŞ, while gas distribution is carried out by local

municipalities and private distribution companies. Prior to 2001, BOTAŞ had

monopoly rights over gas imports, trade, transmission and storage in Turkey.

138

Herbert Smith, European Energy Review 2010: Poland, available at


139 Herbert Smith, European Energy Review 2010: Slovenia, available at


140 Geoplin d.o.o. Ljubljana, Business Report 2009, available on Geoplin‘s

website at www.geoplin.si.

141 This information is taken from the website of the Slovenian energy regulator,

the Energy Agency (Javna agencija Republike Slovenije za energijo),

available at www.agen-rs.si.



http://www.geoplin.si/

http://www.agen-rs.si/

46


The NGML removes BOTAŞ‘s monopoly rights over all activities apart from

national transmission lines, and requires it to be legally unbundled, starting in

2009, to form separate companies for transmission, storage, import and trade.

The act also required that BOTAŞ divest itself of least 10% of its total gas

purchase quantity under take-or-pay contracts every year, to reach a 20%

market share by 2009.142

Nevertheless, the implementation of the liberalisation framework has

proceeded slowly. BOTAŞ‘s gas importation monopoly was not actually broken

until 2007, by the entry of Royal Dutch Shell into the Turkish market.143

In

practice, many gas distribution companies still do not have the option of

purchasing gas from competitive producers, wholesalers or importers, even

though they have a de jure right to do so under the NGML.144

4. Developments in electricity


developments with respect to structural and behavioural separation in the

electricity sector in OECD Member countries and the EU. While the focus of

the Recommendation is on structural separation, experiences with behavioural


order to focus on the most significant developments, not all countries are listed.

4.1 Electricity sector in Australia

The electricity sector in Australia is organised primarily at the state level.

Structural separation was introduced between network activities involving a

natural monopoly (transmission and distribution) and those open to competition

(electricity generation and retailing) in the 1990s. This gave rise to the creation

142

Summaries of the requirements of the liberalisation legislation are contained

in E. Erdogdu, ―A Review of Turkish natural gas distribution market‖ (2010)

14 Renewable and Sustainable Energy Reviews 806-813; EDAM & CEPS,

Second Generation Structural Reforms: Deregulation and Competition in

Infrastructure Industries. The evolution of the Turkish telecommunications,

energy and transport sectors in light of EU harmonisation, published

November 2007, pp.115-118; B. Hacisalihoglu, ―Turkey‘s natural gas policy‖

(2008) 36 Energy Policy 1867-1872 and T. Çetin & F. Oguz, ―The reform in

the Turkish natural gas market: A critical evaluation‖ (2007) 35 Energy

Policy 3856-3867.

143 Reuters, ―Shell first to end Botas gas Monopoly in Turkey‖, published 2

February 2007.

144 Erdogdu, cited fn.142 above, 811.

47


of companies controlled by the states which play a large role. In Victoria and

South Australia, these industries have been largely privatised, and substantial

privatisations of particular assets have occurred in most other states. Where

state governments retain ownership of electricity assets, these are held and

managed as commercial enterprises and new private sector energy infrastructure

has been built. Regulated, non-discriminatory network access is in place for all

companies operating in the electricity sector.145

A national wholesale electricity market, the National Electricity Market

(NEM), was created in Australia in 1998, to provide a wholesale electricity

market covering the south and east of the country. (The states of Western

Australia and the Northern Territory are too remote for inclusion.)146

The NEM is regulated by the Australian Energy Regulator (AER), an

independent legal entity established on 1 July 2005, administratively part of the

Australian Competition & Consumer Commission (ACCC).

The Australian Energy Market Commission (AEMC), established in 2005,

is the rule making body for Australia's energy markets. It is responsible for

making and amending the detailed rules for the NEM. The wholesale market

operator, the Australian Energy Market Operator (AEMO) established in July

2009, manages the wholesale and retail energy markets and oversees the system

operation of Australia's NEM.

In January 2008, the AER's remit was expanded to include the regulation

of electricity distribution networks. Within the NEM the transmission distances

are such that the investments in interconnection infrastructure have not been

sufficient to remove all capacity constraints, and trade within the market is

frequently segmented into regions. Similar issues arise in the wholesale

electricity market that has been established in Western Australia.147

Investment

in the sector has therefore become a key policy issue, in particular in order to

stimulate greater use of renewable energy sources.148

145

OECD Economic Surveys: Australia, Volume 2010/21 – November 2010,

Supplement 3, p.94.

146 OECD Economic Surveys: Australia, cited fn.145 above, p.94.

147 Economic Surveys: Australia, cited fn.145 above, p.94. 148

See for example The Australian, ―Electricity Sector Needs Investors,

published 17 November 2010.

http://www.oecd.org/document/36/0,3746,en_2649_34569_46255013_1_1_1_1,00.html

48


4.2 Electricity sector in Chile

Chile was the first country to institute a comprehensive liberalisation of its

electricity sector, and it is widely regarded as a successful example of electricity

market reform.149

Structural unbundling and privatisation of the electricity

sector in Chile began at an early stage, with the passage of the General Law of

Electric Services in 1982. Reflecting the geography of the country, the Chilean

electricity sector comprises four distinct systems, although the two largest, the

SING in the north of Chile and the SIC supplying the central regions, account

for the vast majority of installed generation capacity.150

Under the reforms, the

largest State-owned vertically integrated electricity company, Endesa, was split

into 14 companies: six generation companies, six distribution companies and

two vertically integrated electricity companies serving isolated areas in the

south. Chilectra, the second largest State-owned electricity company, was

similarly separated into a generation company and two distribution companies.

These horizontally unbundled companies were subsequently privatised, and

generation, transmission and distribution infrastructure in Chile remain entirely

privately owned. On the other hand, vertical re-integration has occurred, so that

some generators also own transmission and distribution assets.151

The 1982 legislation designated two types of customers: free customers

and regulated customers. Free customers are large industrial who contract

directly with generators, and are not subject to price regulation. Regulated

customers are those who contract with local distribution companies, the prices

for which are regulated by the State.152

Transmission tariffs are also

regulated.153

149

See M.G. Pollitt, Electricity Reform in Chile: Lessons for Developing

Countries, Cambridge Working Papers in Economics CWPE 0448, published

January 2005, and International Energy Agency (IEA), Chile: Energy Policy

Review 2009. For further discussion of Chilean electricity market reforms,

see P. del Sol, ―Responses to electricity liberalization: the regional strategy of

a Chilean generator‖ (2002) 30 Energy Policy 437, and L.B. Pascal, ―South

American Electricity – 2006: Year in Review‖ (2007) 13 Law & Business

Review of the Americas 335, pp.342-350.

150 IEA – Chile, cited fn. 149 above, p.136.


152 See Pollitt and IEA, both cited fn. 149 above.


49


While Chile provides a successful example of electricity market reform—

for example, attracting high levels of investment—it has faced a number of

challenges in the years following liberalisation that have had a negative effect

on market performance. These include severe droughts that significantly

reduced hydro generation capacity (Chile‘s primary electricity source), as well

as substantial reductions in natural gas imports from Argentina, which had

similarly effects on generation. Concerns have also been raised about the

continuing high market concentration in the generation sector, as well as the

lack of independence of the transmissions system operators of the SING and

SIC from other market actors.154

4.3 Electricity sector in Estonia

The electricity sector in Estonia is governed by the Electricity Markets

Act, adopted in 2003 in order to implement the EU laws relating to electricity in

preparation for Estonian accession to the EU.155

Under exemptions contained in

the electricity directives, Estonia was required to open 35% of the electricity

market (the large industrial customer segment) to competition by 2009, and the

remainder of the market to competition by 2013. Following amendments to the

Estonian Electricity Market Act of January 2010, large industrial customers

have lost the option to purchase electricity at the regulated price and are instead

required to do so at the open market price.156

Additionally in 2010, Estonia

joined the Nord Pool Spot, the transnational electricity market for the Nordic

countries, creating the NPS Estlink price area with day-ahead trading in the

power exchange. As of 1 June 2010, there were 11 market participants in the

NPS Estlink price area, including companies from Latvia and Lithuania.157

The

Estonian Competition Authority acts as the regulatory agency for the energy

sector in Estonia, including the electricity sector.158

154

IEA – Chile, cited fn. 149 above, pp.153-157.

155 The full text of the Electricity Markets Act, as amended, is available in both

English and Estonian on the website of the Estonian Competition Authority,

at www.konkurentsiamet.ee.

156 Konkurentsiamet/Estonian Competition Authority, Estonian Electricity and

Gas Market: Report 2009, available at www.konkurentsiamet.ee, p.12.

157 Estonian Electricity and Gas Market: Report 2009, cited fn. 156 above, at

p.13.

158 See also Ministry of Economic Affairs and Communications, Development

Plan of the Estonian Electricity Sector until 2018, available at www.mkm.ee,

setting out government policy in relation to the rapidly evolving nature of the

electricity sector in Estonia.

http://www.konkurentsiamet.ee/

http://www.konkurentsiamet.ee/

http://www.mkm.ee/

50


The largest energy company in Estonia is the State-owned, vertically

integrated Eesti Energia Group. The company is responsible for the large

majority of the electricity generated in Estonia (92 % of total production in

2009),159

as well as electricity distribution and trading, and was also previously

the owner of the sole transmission system operator in the country, Elering

ÖU.160

The Group is now subject to legal separation with respect to its various

electricity market activities. Amendments to the Electricity Markets Act in 2010

introduced full ownership unbundling of the transmission system operator, in

line with the requirements of the Third Electricity Directive. Thus, in January

2010 the Estonian State purchased the shares of Elering ÖU from Eesti Energia,

removing it from the Group entirely.161

(Note, however, that both Elering ÖU

and the Eesti Energia Group remain, ultimately, in State ownership.) Within

Estonia, there are also 38 undertakings that provide distribution network

services.162

At the retail level, the largest market operator is a subsidiary of Eesti

Energia, Eesti Energia Jaotusvõrk OÜ, which had an 87% market share in

2009.163

4.4 Electricity sector in the European Union

Liberalisation of the electricity sector in the EU has been on-going since

the mid-1990s, in parallel with the opening of the natural gas sector. The

European Commission‘s Energy Sector Inquiry, considered in detail above,

examined the functioning of both the electricity and natural gas markets in the

EU, taking stock of the effectiveness of liberalisation efforts to that point. Its

conclusions in relation to electricity mirror those relating to natural gas:

electricity markets in the EU, in general, remain highly concentrated at the

wholesale level, while competition at the retail level is also limited; vertical

foreclosure, stemming from the high degree of vertical integration persisting in

the sector, continues to restrict competition; there is a lack of transparency and

information available with respect to price formation and market conditions,

159

Estonian Electricity and Gas Market: Report 2009, cited fn. 156 above, at

p.49.

160 Further information on the Eesti Energia Group is available on its website at

www.energia.ee.


p.44.


p.27.


p.52.

http://www.energia.ee/

51


which hinders new entry and limits consumer choice; and cross-border sales

between EU Member States do not yet pose any significant competitive

constraint, in part due to a lack of interconnector capacity coupled with

insufficient incentives to invest in new capacity.164

The report also highlighted

the complexity and potential for anti-competitive effects stemming from the

operation of the balancing markets for electricity transmission networks,165

such

as the disproportionately high costs for small market players.166

Accordingly, in parallel with its proposals for a Third Gas Directive, the

Commission advocated the enactment of a Third Electricity Directive, which

would introduce essentially the same reforms as were proposed for the natural

gas sector.167

Full ownership unbundling of electricity transmission systems was

presented as the Commission‘s preferred option for market liberalisation, with

the independent system operator approach viewed as a less effective

alternative.168

In the end, however, the Commission‘s proposals for electricity

reform suffered the same fate as its proposal relating to natural gas. Thus, the

final version of the Third Electricity Directive,169

as enacted, allows Member

States to choose between any of three options for unbundling of transmission

system operators: full ownership unbundling,170

the independent system

164

Energy Inquiry Report, cited fn. 81 above. See in particular the Executive

Summary at pp.7-11.

165 Balancing services, in the context of electricity, are used to ensure

equilibrium between supply (i.e. quantity of electricity entering the network)

and demand (i.e. quantity of electricity being taken off the network). As

electricity cannot be stored, the provision of balancing services requires the

facility to increase or decrease generation at short notice, so as to secure the

correct tension on the network. The Energy Inquiry Report (cited at fn. 81

above, at p.295) defined balancing services as including all activities that

transmission services operators engage in order to ensure system stability and

accordingly all costs charged to network users for these services.

166 Energy Inquiry Report, cited fn. 81 above, at pp.295-322.

167 Prospects for the Internal Gas and Electricity Market, cited fn. 85 above. A

more detailed discussion of the Commission‘s initial proposals for reform of

both the electricity and natural gas sectors is set out in the portion of this

report reviewing developments in the gas sector, along with a description of

the unbundling options contained in the Third Energy Directives as

eventually enacted by the Council and European Parliament.

168 Prospects for the Internal Gas and Electricity Market, cited fn. 85, p.12.

169 Third Electricity Directive (2009/72/EC), full citation at fn. 93 above.

170 Third Electricity Directive, Article 9.

52


operator approach,171

or the independent transmission operator approach.172

(These three options are explained in detail in the portion of the report

addressing developments in the natural gas sector in the EU, above.) As in the

gas sector, the Third Electricity Directive maintains the requirement of legal

unbundling of distribution system operators.173

It also contains specific

provisions relating to interconnection and balancing, requiring the allocation of

interconnection capacity, balancing rules and procurement of balancing services

on a non-discriminatory basis.174

4.4.1 Antitrust enforcement

The enforcement of competition law in the electricity sector comprises the

second limb of the Commission‘s two-pronged strategy to improve the

functioning of EU energy markets—market opening via regulation being the

other aspect. The following provides a summary of the Commission‘s

competition enforcement activities in the electricity sector, which have

involved, principally, remedies offered under the merger control rules and

structural and behaviour remedies offered by dominant undertakings under the

commitment decision procedure, in order to address competition problems

identified during the course of antitrust investigations.

In March 2010, Commission accepted commitments from EDF, the

vertically integrated, incumbent electricity undertaking in France,

relating to EDF‘s contracts with large industrial customers. 175

The

Commission had raised concerns that the scope, duration and

exclusive nature of these contracts, plus restrictions relating to the

resale of electricity by industrial customers, amounted to an abuse of

dominance by EDF, insofar as it foreclosed this portion of the

electricity market in France. In order to address these concerns, EDF

committed to ensuring: (i) at least 60% and on average 65% of the

electricity for large industrial customers will be returned to the market

each calendar year; (ii) the maximum duration of new contracts for

large industrial customers will not exceed five years; (iii) industrial

171

Third Electricity Directive, Articles 9(8) and 13.

172 Third Electricity Directive, Articles 9(8) Chapter V.



175 Commission Decision relating to a proceeding under Article 102 of the

Treaty on the Functioning of the European Union and Article 54 of the EEA

Agreement (Case COMP/39.386 – Long-term contracts in France).

53


customers will be offered the option of non-exclusive contracts; and

(iv) removal of resale restrictions from all contracts with industrial

customers.

In the Vattenfall/Nuon Energy merger clearance decision,176

the

Commission approved with conditions the acquisition of Dutch energy

company N.V. Nuon Energy—active in the electricity and gas markets

in the Netherlands, with some activities in Belgium and Germany—by

Vattenfall AB, the vertically integrated State-owned Swedish

electricity incumbent, which also had electricity sector activities in

Germany, Finland, Denmark and Poland.177

Approval was subject to

divestment of Nuon Energy‘s retail electricity business in Berlin and

Hamburg, as these were markets in which both parties had been active

with high market shares prior to the merger. Approval of the merger

was also premised on the basis that Vattenfall planned to divest its

electricity transmission business in Germany, which took place in

March 2010.

In the Swedish Interconnectors commitment decision,178

the State-

owned operator of the electricity transmission network in Sweden,

Svenska Kraftnät (SvK), agreed to subdivide the Swedish system into

two or more bidding zones and to operate it on that basis by 1

November 2011 at the latest. SvK also committed to building and

operating a new 400 kV transmission line on a portion of the network

that could not be operated in an efficient manner by a bidding zones

system. The commitments were offered by SvK to address

competition concerns identified by the Commission relating to the

alleged curtailment of capacity on the Swedish interconnectors, also

operated by SvK, which, it was claimed, restricted exports and thus

kept electricity prices in Sweden artificially low, while electricity

prices in neighbouring Denmark remained, conversely, artificially

high.

176

Merger Procedure Article 6(1)(b) Decision in conjunction with Article 6(2)

of 22 June 2009 in Case No COMP/M.5496 – Vattenfall/Nuon Energy

(C(2009) 5111).

177 Vattenfall acquired a 49% shareholding plus operational control of Nuon

Energy in 2009, and will increase its ownership to a 100% shareholding by

2015.

178 Commission Decision of 14 April 2010 relating to a proceeding under Article

102 of the Treaty on the Functioning of the European Union and Article 54 of

the EEA Agreement (Case 39.351 – Swedish Interconnectors).

54


4.4.2 E.ON commitment decision179

The E.ON commitment decision relating to the German electricity

wholesale and balancing markets represents perhaps the most far-reaching use

of the Commission‘s competition law powers in the electricity sector to date.

The decision involved two areas of the electricity sector in Germany in which

the vertically integrated German energy company, E.ON AG, was active:

On the German wholesale electricity market, the Commission in its

preliminary assessment took the view that E.ON held a collectively

dominant position together with RWE and Vattenfall Europe. In this

market, the Commission was concerned that E.ON might have

followed a strategy of limiting or withdrawing available generation

capacity in the short term, and also of deterring investment in

generation capacity by third parties, both of which had the effect of

raising wholesale electricity prices and, ultimately, prices for final

consumers.

On the market for secondary balancing power in Germany, the

Commission in its preliminary assessment took the view that E.ON

held a dominant position in the E.ON transmission network area,

where the TSO (E.ON Netz, a subsidiary of E.ON) acted as a

monopsonist.) In this market, the Commission was concerned that

E.ON Netz had systematically purchased balancing power from other

E.ON subsidiary companies, rather than more competitively priced

services from non-affiliated companies, and also that E.ON Netz had

prevented the import of lower priced balancing power from other

Member States by refusing prequalification for the generators

concerned.

While E.ON did not accept the allegations of breach of the EU competition

rules contained in the Commission‘s preliminary assessment, it offered a series

of commitments in order to address the competition concerns identified: (i)

179

Commission Decision of 26 November 2008 relating to a proceeding under

Article 82 of the EC Treaty and Article 54 of the EEA Agreement (Cases

COMP/39.388 – German Electricity Wholesale Market and COMP/39.389 –

German Electricity Balancing Market). An informative discussion of the

case is available in P. Hellström, F. Maier-Rigaud & F. Wenzel Bulst,

―Remedies in European Antitrust Law‖ (2009) 76 Antitrust law Journal 43

and in P. Chauve, M. Godfried, K. Kovács, G. Langus, K. Nagy & S. Siebert

―The E.ON electricity cases: an antitrust decision with structural remedies‖

EU Competition Policy Newsletter, Issue 1, 2009, pp.51-54.

55


divestment of substantial quantities of generation capacity in Germany to an

undertaking independent of and unconnected to E.ON; (ii) divestment of its

transmission system business in Germany consisting of the network, the system

operation of the E.ON control area and related activities, to a buyer that was not

an undertaking with an interest in generation or supply of electricity

(unbundling requirement); and (ii) E.ON would not require either the divested

generation capacity or the network for a period of 10 years. After market

testing, the commitments were accepted by the Commission as proportionate to

meet the competition issues identified, and made legally binding on E.ON on 26

November 2008.

In 2009, E.ON‘s extra high voltage transmission network in Germany was

separated from E.ON Netz to form Transpower Stromübertragungs GmbH. The

latter company was sold to TenneT, the Dutch State-owned network owner and

operator which is active only in that segment of the electricity market, from 31

December 2009,180

in a transaction approved by the Commission under the

merger control rules.181

By January 2010, E.ON had ―virtually completed‖ its

obligation to divest 5,000 MW of generation capacity under the terms of the

commitment decision, to companies including Norwegian Statkraft, Belgian

Electrabel and the Austrian Verbund.182

4.4.3 State aid

The electricity sector in the EU has also seen numerous cases taken by the

Commission against the Member States under the State aid rules (now Articles

107 to 109 TFEU). Two examples are:

Power Purchase Agreements in Poland.183

In this decision, the

Commission held that long term power purchase agreements (PPAs),

180

E.ON Press Release, E.ON sells its extra high-voltage transmission network,

published 10 November 2009, available on E.ON‘s website at www.eon.com.

See also Bloomberg, ―E.ON Sells Electricity Network to Tennet to End

Probe‖, published 10 November 2009.

181 Merger Procedure Article 6(1)(b) Decision of 4 February 2010 in Case No

COMP/M.5707 - TenneT/ E.ON (C(2010)850).

182 E.ON Press Release, E.ON virtually completes divestment of 5,000 MW

generation capacity in Germany, published 5 January 2010.

183 Commission Decision of 25 September 2007 on State aid awarded by Poland

as part of Power Purchase Agreements and the State aid which Poland is

planning to award concerning compensation for the voluntary termination of

Power Purchase Agreements (2009/287EC) (OJ L83/1, 28.03.2009).

http://www.eon.com/

http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=C(2010)850

56


under which Poland undertook to purchase at least a minimum volume

of electricity from new or newly modernised electricity generation

plants, constituted undeclared and unlawful State aid. The PPAs were

part of a programme launched by the Polish government in the mid-

90s in order to modernise the electricity sector in Poland, by inter alia

encouraging investment. Poland was required to terminate the PPAs,

but permitted to provide generators with appropriate compensation to

cover their stranded costs. A similar case has been taken against

Hungary, which has likewise been required to terminate its PPAs with

power generators while being permitted to compensate for legitimate

stranded costs.184

On-going Commission investigations into regulated electricity tariffs

in France185

and Spain, 186

as a result of which it is alleged that market

distortions amounting to State aid may have arisen.

4.5 Electricity sector in Finland

On January 2011, the State of Finland announced that it will purchase part

of the shares in the transmission system operator in Finland, Fingrid Oyj. After

the transaction, the State ownership stake in Fingrid will rise from 12% to

53.1% of the company, and so the ownership of the transmission network will

184

European Commission Press Release, IP/08/850 State aid: Commission

requests Hungary to end long-term power purchase agreements and recover

state aid from power generators, published 4 June 2008. The non-

confidential version of the decision itself is not yet publicly available as of

February 2011.

185 European Commission Press Release, IP/09/376 State aid: Commission

extends investigation into regulated electricity tariffs in France, published 10

March 2009. See also State Aid C 17/07 (ex NN 19/07) Regulated electricity

tariffs in France — Extension of the procedure: Invitation to submit

comments pursuant to Article 88(2) of the EC Treaty (2009/C 96/08) (OJ

C96/18, 25.04.2009). This investigation is on-going as of February 2011.

186 See State Aid No C 3/07 (ex NN 66/06) – Regulated electricity tariffs in

Spain: Invitation to submit comments pursuant to Article 88(2) of the EC

Treaty (2007/C 43/10) (OJ C43/9, 27.02.2007). This investigation is on-

going as of February 2011.

57


be fully separate from production of electricity.187

This arrangement is in line

with the requirements of the Third Electricity Directive.

4.6 Electricity sector in Germany

Germany has been an outspoken critic of the EU‘s plans to impose

ownership unbundling in the gas and electricity sectors, and has chosen to

implement the Third Electricity Directive via the third and weakest unbundling

option, the ITO model.188

Nonetheless, in spite of the German government‘s

opposition to a full unbundling requirement for electricity transmission, two of

the four large vertically integrated German energy utilities have divested

ownership their transmission systems, and a third is reported to be considering

at least a partial ownership divestment of its transmission system.189

In March 2010, Vattenfall AB, the vertically integrated electricity

company active principally in Northern Europe, announced the sale of its

subsidiary 50Hertz Transmission GmbH, a regional German transmission

system operator. 50Hertz Transmission owns, operates, develops and maintains

the electricity grids in the German Federal States of Berlin, Brandenburg,

Hamburg, Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt and

Thuringia.190

The Belgian transmission system operator, Elia, took a 60% stake

in 50Hertz Transmission under the terms of the sale, while Industry Funds

Management, a global infrastructure investment manager, took the remaining

40% stake. The acquiring parties committed to pursuing Vattenfall‘s investment

plans in the area, including in the area of interconnection capacity, and the deal

was trumpeted as a step towards the realisation of a pan-European electricity

grid.191

The transaction was completed on 19 May 2010.

187

Further information on Fingrid is available on its website at www.fingrid.fi.

See also Utility Week, ―Fortnum Reaches Deal on Fingrid Sale‖, published 2

February 2011, available online at www.utilityweek.co.uk.

188 See EurActiv, ―Eight EU States Oppose Unbundling, Table ‗Third Way‘‖,

published 1 February 2008, available at www.euractiv.com, for further details

in relation to the split among the EU Member States regarding unbundling.

189 See, e.g. The Times, ―E.ON riles Germany's Government with EU pact to sell

power grid‖, published 28 February 2008.

190 Further information on 50Hertz Transmission is available on its website at

www.50hertz-transmission.net.

191 Vattenfall & Elia Joint Press Release, Elia and IFM to acquire the German

Transmission System Operator 50Hertz Transmission from Vattenfall,

http://www.fingrid.fi/

http://www.utilityweek.co.uk/

http://www.euractiv.com/

http://www.50hertz-transmission.net/

58


As noted previously, pursuant to E.ON‘s commitment decision with the

European Commission,192

as of the end of 2009 it has divested itself of its extra

high voltage transmission network in Germany. The new owner of the network,

TenneT B.V., operates solely as an infrastructure owner and operator in the

Netherlands and now in Germany.193

In October 2010, it was reported that RWE was considering the sale of a

stake of up to 75% of the ownership of its German electricity transmission

network, Amprion, to a company that did not compete with RWE in power

generation or transmission, such as a financial investor. Under the proposal as

reported, RWE would retain Amprion as a division of the group and would

remain the operator of its transmission assets.194

4.7 Electricity sector in Greece

The electricity transmission system on the mainland of Greece has been

operated since 2001 by HTSO SA,195

a company owned by the State (51%) and

PPC SA (49%), the latter being the vertically integrated former monopoly

power company in Greece.196

PPC SA has retained ownership of the

transmission system on the mainland, and furthermore, the transmission systems

on the non-interconnected islands and the distribution networks on the mainland

and on non-interconnected islands are also owned and operated by PPC SA.

Accounting separation requirements for the different business activities of PPC

SA has been in place since 2005.

Greece is planning to adopt the ITO model for its electricity transmission

system under legislation currently being drafted for the implementation of the

EU‘s Third Energy Package in the electricity sector. A wholly owned

published 12 March 2010, available on Vattenfall‘s website at

www.vattenfall.com.

192 Full citation at fn. 179 above.

193 Further information on TenneT B.V. is available on its website at

www.tennet.org.

194 Bloomberg, ―RWE Is Said to Consider Sale of Stake in German Power

Transmission Network‖, published 6 October 2010, available at

www.bloomberg.com.

195 Further information on HTSO SA is available on its website at

www.desmie.gr.

196 Further information on PPC SA is available on its website at www.dei.gr.

http://www.vattenfall.com/

http://www.tennet.org/

http://www.bloomberg.com/

http://www.desmie.gr/

http://www.dei.gr/

59


subsidiary of PPC SA will function as the owner and operator of the

transmission system. The market functions, currently merged within HTSO SA,

will be handed out to an independent market operator. The distribution network

assets will remain within PPC SA, while the operation of the distribution

networks (on the mainland and on non-interconnected islands) will be the

responsibility of another wholly owned subsidiary of PPC SA, distinct from the

owner/operator of the transmission system.

4.8 Electricity sector in Ireland

Liberalisation of the electricity sector in Ireland has been driven by EU law

requirements under the various electricity directives. The incumbent, State-

owned electricity company, the Electricity Supply Board (ESB), remains active

in generation and retail supply, although it is subject to legal separation for its

various corporate activities. ESB acts as the legally independent distribution

system operator for the electricity network in Ireland, operating under licence

from the public energy regulator, the CER. It also provides meter-reading and

data management services to all retail suppliers and customers.197

While the retail

electricity prices charged by ESB in its role as universal service supplier are

regulated by CER, no other retail suppliers are subject to price regulation.198

Another State-owned commercial company, EirGrid, acts as the transmission

system operator of the electricity network in Ireland, as well the transmission

system operator for Northern Ireland, and operator of the Single Electricity

Market on the island of Ireland.199

The retail market for the supply of electricity has been fully open since

2005. In February 2009, the incumbent, State-owned natural gas company, Bord

Gáis, entered the domestic electricity supply market, offering customers

electricity prices at a level guaranteed to be below the regulated electricity

prices charged by ESB, as well as gas and electricity supply dual offers.200

By

197

Further information on ESB is available on its website at www.esb.ie.

198 Further information about CER and its regulatory functions are available on

its website at www.cer.ie.

199 Further information about EirGrid is available on its website at

www.eirgrid.com.

200 Irish Times, ―Bord Gáis Entry into Electricity Market Welcomed‖, published

18 February 2009.

http://www.esb.ie/

http://www.cer.ie/

http://www.eirgrid.com/

60


May 2010, Bord Gáis had 350,000 electricity customers in addition to its

650,000 gas customers in Ireland.201

4.9 Electricity sector in Israel

The electricity sector in Israel remains vertically integrated, with a single,

State-owned company—Israel Electric Company—responsible for substantially

the whole of the electricity generation, transmission, distribution and retailing in

the country.202

In 2003, the Israeli government indicated its intent to move

towards a more competitive market structure, a decision it reaffirmed in 2006.

The proposed reforms would involve the deregulation and privatization of the

generation and retailing segments, leaving transmission and distribution

regulated to provide open access to all end-users.203

However, market

liberalisation has not yet been realised.

4.10 Electricity sector in Italy

Prior to liberalisation, which began in 1999 as mandated by the First

Electricity Directive, the Italian electricity sector was dominated by a vertical

integrated State-owned company, ENEL, which was responsible for the whole

of the electricity generation, transmission, distribution and retailing in the

country.

In 1999, the wholesale supply of electricity was liberalised, and ENEL‘s

monopoly in the generation sector was broken up. The divestiture by ENEL of

part of its generation assets allowed for the establishment of three new

generation companies (GENCOs). Moreover, in order to reduce the presence of

the State-owned incumbent, antitrust ceilings in the upstream generation

markets were put in place, which provided that no single operator could control

more than 50% of the generation and import capacity.

In 1999, the Italian legislation also introduced the legal unbundling of

generation, transmission, distribution and retailing of electricity, as well as the

201

Bord Gáis Press Release, Bord Gáis Energy Celebrates its One Million

Customers by Launching the Community Energy Fund, published 5 May

2010.

202 Further information on Israel Electric Company is available on its website at

www.israel-electric.co.il.

203 See A. Tishlera, J. Newmanb, I. Spektermanb & C.K. Woo, ―Assessing the

options for a competitive electricity market in Israel‖ (2008) 16(1) Utilities

Policy 21.

http://www.israel-electric.co.il/

61


Independent System Operator (ISO) model in transmission. The implementation

of the ISO model imposed separation between ownership and management of

the national transmission grid. In particular, ownership of the transmission grid

was retained indirectly by ENEL, by means of its wholly-owned subsidiary

company TERNA, whereas the management of the transmission network was

transferred to GRTN (the ISO), whose sole shareholder was the Ministry of

Treasury. As a result, TERNA‘s managed and developed the grid according to

GRTN‘s directives.

However, the ISO model proved to be inadequate in providing the right

incentives for investments in the Italian transmission network; in September

2003 a major black out—involving the whole national territory—provided clear

evidence of such inadequacy.204

Moreover, the coordination activities between

TERNA and GRTN proved to be too burdensome.

Due to the flaws of the ISO model, in 2003 the reunification of ownership

and control of the transmission network within TERNA was established by law.

This was followed by the total divestiture by ENEL of TERNA in 2005, that is,

the adoption of the proprietary unbundling model, whereby the previous

vertically integrated monopolist in the electricity sector transferred its control

stake to TERNA to CASSA DEPOSITI E PRESTITI, held in majority by the

Italian Government.205

4.11 Electricity sector in Mexico

Electricity generation, transmission, supply and distribution in Mexico

remain, by and large, State monopoly activities, carried out by one public

company, formed by a 2009 merger of the Federal Electricity Board, which

provides 80% of electricity in the country, and Central Power and Light, which

operated only in the centre of the country providing the remaining 20% of

electricity. An amendment to Mexico‘s energy laws in 1992, however, allowed

for private investment at the generation level. This has led to market entry by

both small domestic producers and large foreign producers. Private electricity

generators are required to sell their power to the Federal Electricity Board for

distribution. Currently, about a third of all electricity produced in Mexico comes

204

See OECD, Report on Experiences with Structural Separation (2006), at

pp.15-16, for further discussion of the 2003 blackout, and in particular, the

outcome of the investigation into its causes.

205 Further information on TERNA is available on its website at www.terna.it.


http://www.terna.it/

62


from private generation, with the remainder generated by the publicly owned

utility.206

4.12 Electricity sector in New Zealand

The Electricity Industry Reform Act 1998 required full ownership

separation in New Zealand between electricity lines, on the one hand, and

generation and retailing on the other—although subsequent amendments to the

legislation have introduced exemptions to the separation requirement for, in

particular, renewable energy and small scale generation capacity.207

There are

currently five principal electricity generation companies in New Zealand, which

account for 92% of electricity generated in the country. Three of these

companies are State-owned enterprises: Genesis, Meridian and Mighty River

Power. Two are publicly traded and in majority private ownership: Contact and

the smallest generating company, TrustPower. All five generation companies

are also active in electricity wholesaling and retailing, and thus are known as

―gentailers‖.208

The five principal gentailers retail approximately 96% of the

electricity purchased in the wholesale market, with the remainder purchased by

a number of smaller retailers.209

The electricity transmission system in New Zealand is owned and operated

by Transpower, a State-owned enterprise.210

In addition, there are

approximately 28 electricity distribution businesses, the ownership of which is a

mix of public listings, shareholder co-operatives, community trusts and local

body ownership. Amendments that have been made to the structural separation

regime under the 1998 Act mean that distribution businesses are now allowed to

own some generation capacity, and to sell the output from those stations.211

206

See Y. Cancino-Solórzanoa, E. Villicaña-Ortizb, A.J. Gutiérrez-Trashorrasb

& J. Xiberta-Bernatb, ―Electricity sector in Mexico: Current status.

Contribution of renewable energy sources‖ (2010) 14 Renewable and

Sustainable Energy Reviews 454.

207 See the Electricity Industry Reform Amendment Acts of 2001, 2004 and

2008.

208 Commerce Commission, Investigation into New Zealand Electricity Markets:

Investigation Report, published 21 May 2009, available on the Commerce

Commission‘s website at www.comcom.govt.nz, pp.26-30.

209 NZ Electricity Markets Investigation Report, cited fn. 208 above, p.39.



http://www.comcom.govt.nz/

63


In 2005, the New Zealand Commerce Commission began an investigation

of the wholesale and retail electricity markets in the country under Part 2 of the

Commerce Act 1986,212

which prohibits certain restrictive trade practices. This

investigation followed the receipt of a number of complaints about the

behaviour of companies in those markets and mounting public concern about

their competitiveness. The final report, published in May 2009, concluded that

the four largest gentailers—Contact, Genesis, Meridian and Mighty River

Power—each had, and had exercised, significant market power. Indeed, over a

period of some six and a half years the four gentailers had exercised their

substantial market power to earn market rents estimated conservatively to be

$4.3 billion.213

Nonetheless, the report did not identify any specific

anticompetitive conduct on the part of the gentailers that breached the

Commerce Act 1986. Moreover, while it acknowledged that there were serious

problems with the existing market rules and structure, the Commerce

Commission was of the opinion that it would be premature to consider the

implementation of price regulation in the sector, in view of an on-going review

of the issue that was taking place at government level.214

This latter review, which commenced in April 2009, had as its objective

―to improve the performance of the electricity market and its institutions and

governance arrangements in order to better achieve the government‘s objectives

for the electricity sector.‖215

It culminated in the adoption by the New Zealand

government, in December 2009, of 29 measures to be implemented in order to

improve the functioning of the electricity markets in the country. These included,

inter alia: the re-distribution of generation assets among the State-owned

gentailers; permitting electricity distribution businesses to retail electricity,

subject to legal separation of these divisions, and continued ownership

separation of distribution and generation; greater standardisation of line tariffs

and use-of-system business rules; and improved regulation including the

establishment of a new sector regulator.216

Many of these changes are included in

212

The Commerce Act 1986 is New Zealand‘s primary competition law statute.



215 See the Press Release issued by the Minister for Energy and Resources,

Ministerial Review of Electricity Market, published 1 April 2009, and

accompanying Terms of Reference for a Ministerial Review of Electricity

Market Performance, both available from the website of the New Zealand

Government at www.beehive.govt.nz.

216 Ministry of Economic Development, Summary of Main Decisions:

Ministerial Review into Electricity Market Performance, published 9

December 2009, available on the Ministry‘s website at www.med.govt.nz.

http://www.beehive.govt.nz/

http://www.med.govt.nz/

64


the new Electricity Industry Act 2010, enacted on 5 October 2010, including

modification of the rules on structural separation to permit distributors to engage

in retailing but not large-scale generation.217

As of 1 November 2010, the

Electricity Authority has also been established as New Zealand‘s electricity

market regulator.218

Amendments to the Commerce Act in 2008 require the Commerce

Commission to make recommendations to government regarding the most

appropriate price-quality regulation to be applied to Transpower, the electricity

system operator.219

Following a consultation process,220

the Commerce

Commission in December 2010 announced the price-quality requirements and

annual revenue cap to be applied to Transpower from 1 April 2011.221

4.13 Electricity sector in the Netherlands

Prior to liberalisation of the Dutch electricity sector, the market was

dominated by four vertically integrated, non-competing regional electricity

companies, which co-operated through SEP, a joint stock company. SEP was

dissolved in 2001,222

and the electricity market was fully liberalised on 1 July

2004, in line with EU law requirements, when all retail customers became free

to choose their own electricity supplier. Legal unbundling of the supply and

217

See Part 3 of the Electricity Industry Act 2010.

218 Further information on the Electricity Authority is available on its website at

www.ea.govt.nz.

219 Commerce Commission, Transpower Process and Recommendation

Discussion Paper, published 19 June 2009, available on the Commerce

Commission‘s website at www.comcom.govt.nz. The legislative changes

followed an administrative settlement between the Commerce Commission

and Transpower of 13 May 2008, regarding its revenue requirements, capital

requirements and adherence to the terms of its systems operator services

agreement.

220 See e.g. Commerce Commission, Individual Price-Quality Path

(Transpower) Consultation Update Paper, published 9 November 2010,

available on the Commerce Commission‘s website at www.comcom.govt.nz.

221 Commerce Act (Transpower Individual Price-Quality Path) Determination

2010, Commerce Commission Decision No.714, of 22 December 2010. See

also Commerce Commission, Individual Price-Quality Path. Reasons Paper,

published 23 December 2010. Both are available on the Commerce

Commission‘s website at www.comcom.govt.nz.

222 International Energy Agency (IEA), The Netherlands: Energy Policy Review

2008, p.91.

http://www.ea.govt.nz/




65


distribution networks was also required at this time.223

Ownership of one of the

four regional generators, Eneco, has remained in public hands, being owned by

about 60 Dutch municipalities.224

The other three generators have been acquired

by foreign utilities: Essent is now a part of the German energy company, RWE

AG;225

Oxxio is owned by UK energy company, Centrica;226

and Nuon is a part

of the Swedish energy company, Vattenfall.227

The transmission system in the Netherlands is controlled by the ownership

unbundled, State-owned holding company, TenneT Holding B.V.. The

regulated, independent transmission system operator is a subsidiary company,

Tennet TSO, B.V., while other ancillary services for the transmission grid are

provided by other, non-regulated companies in the TenneT group.228

The public

regulator for the electricity sector in the Netherlands is the Office of Energy

Regulation (Energiekamer), which operates as a chamber of the Dutch

competition authority, the NMa.229

4.14 Electricity sector in Portugal

The electricity transmission system operator in Portugal, Rede Eléctrica

Nacional (―REN‖), was legally unbundled in 2000. However, the privatised,

incumbent electricity company in Portugal, EDP, retained a 30% shareholding

in REN, with the remainder held by the State. In early 2007, REN was

converted into a holding company, REN – Redes Energéticas Nacionais, SGPS,

SA, and the high-voltage electricity transmission lines were transferred to a

newly-created company within the REN group, Rede Eléctrica Nacional. (The

REN group also performs the function of transmission system operator for the

223

IEA – The Netherlands, cited fn. 222 above, p.92.

224 Further information on Eneco is available on its website at www.eneco.nl.

225 Further information on Essent is available on its website at www.essent.nl.

226 Further information on Oxxio is available on its website at

www.oxxiopers.nl. Centrica has, however, indicated some interest in selling

its Dutch business; see Reuters, ―Centrica seeking Dutch Oxxio sale, buyers

interested‖, published 29 October 2009.

227 Further information on Nuon is available on its website at www.nuon.com.

228 Further information on TenneT is available on its website at www.tennet.org.

229 Further information on the Energiekamer is available on its website at

www.energiekamer.nl.

http://www.eneco.nl/

http://www.essent.nl/

http://www.oxxiopers.nl/

http://www.nuon.com/

http://www.tennet.org/

http://www.energiekamer.nl/

66


natural gas sector in Portugal, described above.) The company was then 49.9%

privatised, and the EDP shareholding was reduced to 5%.230

In accordance with EU law requirement, electricity distribution in Portugal

has been legally unbundled from generation, transmission and supply activities.

Nonetheless, the medium-voltage distribution system operator, EDP

Distribuição, which holds a 35-year public distribution concession, remains

100%-owned by EDP. Distribution at lower-voltage levels is carried out by

operators, including EDP, pursuant to 20 year public concessions granted at the

regional level.231

As of September 2006, full liberalisation of the retail electricity market in

Portugal has been in place. However, competition at the retail level has been

slow to develop, arguably due, at least in part, to the structure of electricity

price regulation in the country.232

4.15 Electricity sector in Switzerland

The electricity sector in Switzerland is now subject to regulation following

the entry into force of the Electricity Supply Act (StromVG) on 1 January 2008.

The Act provides for a two-stage liberalisation procedure, under which large

industrial users will be free to choose their supplier from 1 January 2009. Full

market liberalisation is envisaged from 2014, but entry into force of this second

phase is subject to an optional referendum.233

The new legislation requires that an independent transmission network

operator be established to operate the high-tension transmission network. In

230

International Energy Agency (IEA), Portugal: Energy Policy Review 2009,

pp.122-123. Further information on the REN group is available on its

website at www.ren.pt. See also P. Ferreira, M. Araújoa & M.E.J. O‘Kelly,

―An Overview of the Portuguese Electricity Market‖ (2007) 35 Energy

Policy 1967.

231 IEA – Portugal, cited fn. 230 above, p.116.

232 IEA – Portugal, cited fn. 230 above, p.124. For the European Commission‘s

view on the negative impact of regulated energy prices in the EU, see

Communication from the Commission to the Council and the European

Parliament: Report on Progress in Creating the Internal Gas and Electricity

Market, SEC(2009) 287, COM(2009) 115 final, published 11 March 2009,

pp.11-12.

233 Herbert Smith, European Energy Review 2010: Switzerland, available at


http://www.ren.pt/


67


anticipation of this requirement, the Swiss power companies established

Swissgrid AG to act as network operator, which commenced operations in

December 2006. In December 2008, Swissgrid was formally confirmed as the

national transmission system operator in Switzerland.234

Swissgrid remains

wholly owned by the eight Swiss electricity companies.235

Furthermore, the legislation requires the establishment of a national

regulator for the electricity sector, to monitor and enforce compliance with the

Act, in particular the provisions relating to network access. To satisfy this

requirement, the Swiss government has established the Electricity Commission

(ElCom), to act as independent regulatory authority for the sector.236

4.16 Electricity sector in Slovenia

In 1991, the State-owned, vertically integrated electricity system in

Slovenia was vertically and horizontally unbundled, being split into eight

independent generation companies, a transmission system operator and five

regional distribution companies, all majority-owned by the State.237

In 1999, in

preparation for EU accession, Slovenia adopted a new Energy Act, which put in

place, inter alia, a system of regulated third party access to the electricity

network, with an independent regulator with responsibility for regulating access

charges.238

This legislation was amended in 2004 in order to implement the

Second Electricity Directive: the market for all customers, except for household

customers, was opened from 1 July 2004, while the Slovenian electricity market

was fully opened on 1 July 2007 for all customers.239

Re-organisation and

merger of the State-owned generation companies took place in 2001, to create

Slovenia‘s largest power generation group, HSE,240

and again in 2006, to create

234

Herbert Smith – Switzerland, cited fn. 233 above, pp.132-133.

235 Further information on Swissgrid is available on its website at

www.swissgrid.ch.

236 Herbert Smith – Switzerland, cited fn. 233 above, p.133. Further information

on ElCom is available on its website at www.elcom.admin.ch.

237 N. Hrovatin, ―Restructuring the Slovenian Electricity Industry: The Benefits

and Costs of Introducing the Electricity Market‖, (2001) 39(5) Eastern

European Economics 6, p.7.

238 N. Hrovatin, R. Pittman & J. Zorić, ―Organisation and Reforms of the

Electricity Sector in Slovenia‖, (2009) 17 Utilities Policy 134, p.135.

239 Hrovatin et al, cited fn. 238 above, p.135.

240 Further information on HSE is available on its website at www.hse.si.

http://www.swissgrid.ch/

http://www.elcom.admin.ch/

http://www.hse.si/

68


a second power generation group, GEN Energija,241

in order to increase

competition in the electricity market.242

While privatisation of the State-owned

generation assets has been suggested for some time, in more recent years these

plans have faltered.243

In October 2010 it was reported that the Slovenian

government is considering the reintegration of HSE and GEN Energija, in order

to increase investment in the electricity sector.244

A merger of the distribution

utilities has also been recommended by commentators, in order to allow them to

exploit economies of scale.245

5. Developments in telecommunications


developments with respect to structural and behavioural separation in the

telecommunications sector in OECD Member countries and the EU. While the

focus of the Recommendation is on structural separation, experiences with

behavioural separation such as accounting or functional separation are included

as well. In order to focus on the most significant developments, not all countries

are listed.

5.1 Telecommunications sector in Australia

Telstra, the formerly State-owned telecommunications incumbent in

Australia, was progressively privatised between 1997 and 2006 as a vertically

and horizontally integrated company. Telstra owns the existing fixed (copper)

network, providing access to its network and supplies wholesale services to

companies that compete with it in downstream retail markets. It also owns the

largest mobile network, the largest hybrid fibre coaxial cable network in

Australia and 50% of Australia‘s largest subscription television provider.246

241

Further information on GEN Energija is available on its website at www.gen-

energija.si.


243 Horvatin et al, cited fn. 238 above, p.137-138.

244 Financial Times, ―Energy: National Merger may be necessary for Regional

Expansion‖, published 11 November 2010.


246 Parliament of the Commonwealth of Australia, House of Representatives,

Telecommunications Legislation Amendment (Competition and Consumer

Safeguards) Bill 2009. Explanatory Memorandum, p.7.

http://www.gen-energija.si/

http://www.gen-energija.si/

69


As of 1 December 2006, Telstra has been subject to an operational

separation framework which obliges it to maintain separate retail, wholesale and

key network services business units.247

Nevertheless, the Australian government

has expressed the view that:

Telstra‘s integrated position across all the telecommunications

platforms has led to longstanding and widespread concerns that the

existing telecommunications structure is failing consumers, businesses

and the economy in general.248

In order to address the perceived competition problems in the

telecommunications sector, the government has proposed a twofold strategy: the

development of a government-driven national broadband network and the

structural separation of Telstra on a voluntary or if necessary compulsory basis.

The proposed national broadband network (NBN) aims to provide

broadband infrastructure via fibre to 93% of premises in Australia, fixed-

wireless to 4% of premises and satellite to the remaining, most remote 3% of

premises.249

The objective of the project is to ―level the competitive playing

field‖ in the broadband sector by, inter alia, deploying infrastructure where

bottlenecks currently exist, and operating on a wholesale-only, open access

basis with equivalent service for all access seekers thereby removing the

problems of vertical integration.250

The estimated cost for the project is AUS$43

billion, the largest single investment in a single infrastructure ever made by the

federal government. It will rely on government funds exclusively in the initial

stages, with later involvement of private capital.251

The NBN proposal

247

For a description of the operational separation regime currently in place, see

the website of the Department of Broadband, Communications & the Digital

Economy at

www.archive.dcita.gov.au/2007/11/connect_australia/operational_separation.

248 Parliament of the Commonwealth of Australia, House of Representatives,

Telecommunications Legislation Amendment (Competition and Consumer

Safeguards) Bill 2009. Explanatory Memorandum, p.8.

249 Department of Broadband, Communications & the Digital Economy,

National Broadband Implementation Study, published 6 May 2010.

250 National Broadband Implementation Study, cited at fn. 249 above, p.26. See

also Media Release of the Minister for Broadband, Communications and the

Digital Economy, NBN Legislation introduced to Parliament, published 25

November 2010, announcing the introduction into parliament of draft

legislation to regulate the operations of NBN as ―an open-access, wholesale-

only network, to support retail-level competition for Australian consumers.‖

http://www.archive.dcita.gov.au/2007/11/connect_australia/operational_separation

70


acknowledges that the project is likely to create a monopoly in passive network

access in most of Australia, and therefore urges foresight, so that possible later

privatisation is made ―conditional on a healthy industry structure outcome‖, and

to ―ensure that decisions are not made today that are short-sighted relative to

long-term competition goals.‖252

A new company, NBN Co., has been

established to build and operate the network.253

While the NBN proposal contemplated the possibility that Telstra would

not participate in the development of the project, on 20 June 2010 NBN Co. and

Telstra announced that they had reached an agreement with regard to the NBN.

The agreement provides for the reuse of suitable Telstra infrastructure

(including pits, ducts and backhaul fibre) by NBN Co. in order to prevent

unnecessary duplication, plus the progressive migration of customers from

Telstra‘s copper and pay-TV cable networks to the new wholesale-only fibre

network.254

Concurrently with the development of the NBN, the government

announced plans to enact legislation that would induce Telstra to adopt

functional separation of its wholesale and retail operations voluntarily, or

alternatively, have compulsory functional separation imposed on the company.

In circumstances where Telstra refused to comply voluntarily, the company

would be deprived of certain wireless spectrum.255

The bill received a first

reading in Parliament, and in its announcement of the agreement between

Telstra and NBN Co. in relation to the NBN, the government noted its

continued hope to pass the legislation, in order ―to provide greater certainty to

the industry.‖256

It is unclear whether the portions of the legislation relating to

251

National Broadband Implementation Study, cited fn. 249 above, p.38.

252 National Broadband Implementation Study, cited fn. 249 above, p.45.

253 See Joint Media Release of the Prime Minister, Treasurer, Minister for

Finance and Deregulation and Minister for Broadband, Communications and

the Digital Economy, New National Broadband Network, published 7 April

2009.

254 See Joint Media Release of the Prime Minister, Minister for Finance and

Deregulation and Minister for Broadband, Communications and the Digital

Economy, Agreement between NBN Co. and Telstra on the rollout of the

National Broadband Network, published 20 June 2010.

255 See Parliament of the Commonwealth of Australia, House of

Representatives, Telecommunications Legislation Amendment (Competition

and Consumer Safeguards) Bill 2009.

256 See Joint Media Release of 20 June 2010, cited fn.254 above.

71


functional separation will be retained in any final version of the act. In any

event, the agreement of 20 June 2010 came on foot of a written guarantee from

the government that Telstra would not be deprived of spectrum should the

transaction be completed.257

5.2 Telecommunications sector in Chile

The telecommunications sector in Chile has been privatised for more than

two decades, and there is significant intermodal competition.258

While

competition exists at the level of domestic and international call services, the

incumbent firms at the fixed-line level (namely Telefonica CTC in most of the

country and Telsur and Telcoy in some parts of the south) hold significant

market power.259

In August 2010, it was reported that the Chilean government

proposed to enact legislation that would lead to the creation of an infrastructure-

only player in the telecommunications sector, decoupling network operations

from service activities in Chile. In particular, the infrastructure operator would

rent out its infrastructure to third parties that would operate only in the

downstream services market.260

5.3 Telecommunications sector in Estonia

In Estonia, the EU regulatory framework for telecommunications has been

transposed into national law by the Electronic Communications Act, which

entered into force on 1 January 2005. This makes provision inter alia for the

imposition of access and interconnection obligations on undertakings with

significant market power in a telecommunications market. The 2005 Act also

gives regulators the power to require accounting or functional separation in

certain circumstances.261

Nevertheless, take-up of unbundled local loop access

257

See Telstra Press Release, Telstra signs Financial Heads of Agreement on

NBN, published 20 June 2010.

258 Latin American Competition Forum, 2009, Session IV: Competition Issues in

Telecommunications – Contribution from Chile (TDLC), available on the

OECD‘s website at www.oecd.org/competition/latinamerica, p.1.

259 OECD, Competition Law and Policy in Chile – A Peer Review (2004),

available on the OECD‘s website at:

http://www.oecd.org/dataoecd/43/60/34823239.pdf.

260 See Business News Americas, ―Government to encourage entrance of

telecommunications infrastructure operators – Chile‖, published 12 August

2010.

261 See International Comparative Legal Guide, Telecommunications Laws and

Regulations 2010, Chapter 16: Estonia, available at www.iclg.co.uk.

http://www.oecd.org/competition/latinamerica



72


has been slow, and competitors have invested more heavily in competing

platforms, such as wireless technologies and cable.262

In December 2008, the

Estonian government announced its view that functional separation within the

telecommunications sector could be imposed only as an exceptional measure,

which could not be implemented unless there was no other less onerous option

that could achieve the desired objectives.263

On the other hand, the government

plans to support the establishment of a country-wide high speed broadband

infrastructure, the EstWin project, which will link rural areas with the existing

optical fibre network and give them access to high speed internet services. The

infrastructure will then be made available to all operators under the same

conditions. In July 2010, the European Commission granted approval for

investment by the Estonian government for the project, under the European

State aid rules.264

5.4 Telecommunications sector in the European Union

EU telecommunications law does not mandate functional structural

separation of vertically integrated companies. Nevertheless, Directive

2009/140/EC,265

which was enacted on 25 November 2009, amends the Access

Directive266

to make express provision for the availability of functional

separation as a potential remedy for competition problems. The new Article

13a(1) to the Access Directives provide as follows:

262

KPMG, Functional Separation in Central and Eastern Europe, Advisory

(2009), available at www.kpmg.com, pp.28-29. See also the European

Commission Staff Working Document accompanying the Communication

from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions,

Progress Report on the Single European Electronic Communications Market

(15th

Report), published 25 May 2010 (COM(2010) 253, pp.156-166.

263 KPMG Report, cited fn. 262 above, p.34.

264 European Commission Press Release, IP/10/975 State aid: Commission

approves state aid for high speed internet in Estonia, published 20 July 2010.


November 2009 amending Directives 2002/21/EC on a common regulatory

framework for electronic communications networks and services,

2002/19/EC on access to, and interconnection of, electronic communications

networks and associated facilities, and 2002/20/EC on the authorisation of

electronic communications networks and services (OJ L337/37, 18.12.2009).


March 2002 on access to, and interconnection of, electronic communications

networks and associated facilities (Access Directive) (OJ L108/7, 24.4.2002).

http://www.kpmg.com/

73


Where the national regulatory authority concludes that the

appropriate obligations imposed under Articles 9 to 13 have failed to

achieve effective competition and that there are important and

persisting competition problems and/or market failures identified in

relation to the wholesale provision of certain access product markets,

it may, as an exceptional measure, in accordance with the provisions

of the second subparagraph of Article 8(3), impose an obligation on

vertically integrated undertakings to place activities related to the

wholesale provision of relevant access products in an independently

operating business entity.

That business entity shall supply access products and services to all

undertakings, including to other business entities within the parent

company, on the same timescales, terms and conditions, including

those relating to price and service levels, and by means of the same

systems and processes.267

A national regulatory authority is required to get the approval of the

European Commission, as well as to conduct a co-ordinated analysis of the

different markets related to the access network, prior to imposing any

compulsory functional separation arrangement.268

Although, arguably, the

compulsory imposition of functional separation was already a possibility under

the existing Article 8(3) of the Access Directive,269

the amendments make

explicit its availability to national regulatory authorities. On the other hand,

Directive 2009/140/EC emphasises the fact that compulsory functional

separation is an ―exceptional measure‖,270

which should be imposed only in

―exceptional cases‖.271

In particular, its use must not harm incentives to invest

267

Directive 2009/140/EC, Article 2(10).

268 Directive 2009/140/EC, Article 2(10), inserting a new Article 13a(2)-(4) into

the Access Directive.

269 Centre for European Policy Studies, Achieving the Internal Market for E-

Communications (Brussels, 2008), p.16. On the other hand, the European

Regulators Group in its Opinion on Functional Separation (ERG (07) 44),

issued in 2007, took the view that functional separation was not available as a

remedy under the electronic communications regulatory framework then in

force, but proposed that it should be available to national regulators as a

―supplementary device‖ (p.9-10), for use in circumstances where other

remedies proved inadequate to address discriminatory behaviour.

270 Directive 2009/140/EC, Article 2(10), inserting a new Article 13a(1) into the

Access Directive.

271 Preamble to Directive 2009/140/EC, recital (61).

74


in the network, entail any potential negative effects on consumer welfare or

prevent appropriate co-ordination mechanisms between the different separate

business entities in order to ensure that the economic and management

supervision rights of the parent company are protected.272

A vertically integrated telecommunications undertaking with significant

market power that intends to implement functional or ownership separation of

its local access network assets is now required to inform the relevant national

regulatory authority in advance of these proposals. The national regulator must

assess the effect of the intended transaction, and to impose, maintain or

withdraw the undertaking‘s regulatory duties, as appropriate.273

In the telecommunications sector, as in the energy sector, the Commission

has combined legislative reforms with antitrust enforcement activities that

address anti-competitive practices by vertically integrated companies. Two

recent decisions, Deutsche Telekom and Telefónica, have each involved

exclusionary pricing through margin squeeze by vertically integrated

telecommunications firms. In the Deutsche Telekom case,274

the Commission

found that the incumbent provider in Germany, Deutsche Telekom, was

charging to intermediate users (internet providers) higher wholesale prices than

the retail prices that it charged to some final consumers of Deutsche Telekom‘s

own broadband services. Thus, competitors of Deutsche Telekom´s retail

internet subsidiary had negative margins even if they were as efficient

downstream as the Deutsche Telekom subsidiary. Similarly, in the Telefónica

case,275

the Commission held that the margin between the retail prices charged

by the incumbent telecommunications provider in Spain, Telefónica, and the

prices that it charged for wholesale broadband access at both the national and

regional levels was insufficient to cover the costs that an as-efficient operator

would have incurred in order to provide retail broadband access. A fine of more

than €151 million was imposed on Telefónica in response to what the

272

Preamble to Directive 2009/140/EC, recitals (61)&(62).

273 Directive 2009/140/EC, Article 2(10), inserting a new Article 13b into the

Access Directive.

274 Case COMP/C-1/37.451, 37.578, 37.579 — Deutsche Telekom AG (decision

of 21 May 2003); upheld on appeal before the Court of First Instance (now

the General Court) in Case T-271/03 Deutsche Telekom v Commission

[2008] ECR II-477 and the European Court of Justice in C-280/08 P

Deutsche Telekom v Commission (judgment of 14 October 2010).

275 Case COMP/38.784 – Wanadoo España vs. Telefónica (decision of 4 July

2007); currently on appeal to the General Court in T-336/07 Telefónica and

Telefónica de España v Commission.

75


Commission deemed a very serious breach of Article 82 EC (now Article 102

TFEU) on abuse of dominance. In a third case, Wanadoo Interactive,276

the

Commission held that the vertically integrated incumbent telecommunications

firm in France had abused its dominant market position by charging predatory

prices for retail broadband services, which did not allow it to cover its variable

costs. Note that in contrast to antitrust cases in the energy sector, in the

telecommunications sector the remedies imposed have been behavioural in

nature, involving fines and requirements to bring anticompetitive practices to an

end.

5.5 Telecommunications sector in Finland

Pursuant to section 89 of the Finnish Communications Market Act,277

(393/2003), the Finnish Communications Regulatory Authority may impose an

obligation on a telecommunications operator with significant market power to

put in place accounting separation, dividing its functions with regard to the

leasing out of access rights and interconnection from other service provision

activities, where this is deemed necessary in order to monitor pricing of access

rights and interconnection. This provision has been widely used with respect to

significant market power operators in several markets.

5.6 Telecommunications sector in Israel

In Israel, the formerly State-owned telecommunications incumbent, Bezeq,

remains vertically integrated in relation to its fixed line services.278

In March

2008, in a report commissioned by the Minister of Communications, the Gronau

Committee recommended that Bezeq be subjected to local loop unbundling, in

order to develop a wholesale market for fixed communications. The report took

the view that structural separation between network and services provision was

desirable but not necessary, and so recommended that separation be

implemented only if it is established, after introduction of LLU, that Bezeq‘s

actions impede the development of competition. At the same time, the report

recommended that the certainty of the regulatory regime should be improved, in

order to provide sufficient incentives to the incumbent to invest in next

generation networks, and that, as competition in the sector increases, restrictions

276

Case COMP/38.233 – Wanadoo Interactive (decision of 16 July, 2003);

upheld on appeal in cases Case T‑340/03 France Télécom v Commission

[2007] ECR II‑107 and Case C-202/07 P France Télécom v Commission

[2009] ECR I-2369.

277 393/2003, available online at www.finlex.fi.

278 Further information on Bezeq is available on its website at www.bezeq.co.il.

http://www.finlex.fi/

http://www.bezeq.co.il/

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on the bundling of services that have been imposed on Bezeq should be

removed.279

In August 2008, the recommendations of the Gronau Report were

accepted, in large part, by the Minister of Communications, including in

relation to LLU.280

Implementation of the report appears to have proceeded

slowly, however, and by May 2010 the telecommunications sector in Israel

remained to be liberalised effectively.281

It is interesting to note that the prohibition on bundling arrangements also

applies to Israel‘s cable communications company, HOT.282

The Gronau Report

observed that, in spite of the fact that Israel is one of few countries worldwide

that has two fixed infrastructures (fixed telephony and cable), the market has

devolved into a duopoly structure, which has led to a slowdown in innovation

and upgrading.283

5.7 Telecommunications sector in Italy

In 2002, the telecommunications regulator in Italy, AGCOM, adopted

Resolution 152/02/CONS, which ostensibly imposed both accounting and

functional separation arrangements on the incumbent telecommunications

company, Telecom Italia. Under the Resolution, Telecom Italia‘s obligations of

accounting separation were defined in precise terms, while it was permitted far

greater latitude with respect to its duties of operational separation.284

In 2007,

AGCOM held a public consultation on functional separation, and proposed

legislation that would allow it to impose functional separation on firms with

279

The Report of the Committee for Promotion of Competition in the

Telecommunications Industry in Israel, Executive Summary, March 2008

(unofficial English translation), also known as the Gronau Report.

280 The Report of the Committee for Promotion of Competition in the

Telecommunications Industry in Israel, Ministerial Adoption, April 2008

(unofficial English translation).

281 European Commission, Commission Staff Working Document accompanying

the Communication for the Commission to the European Parliament and the

Council: Taking Stock of the European Neighbourhood Policy (ENP) –

Progress Report Israel 2009, published 12 May 2010 (SEC(2010) 520), p.15.

282 Further information on HOT is available on its website at www.hot.net.il.

283 Gronau Report, cited fn. 279 above.

284 A. Nucciarelli & B.M. Sadowski, ―The Italian way to functional separation:

An assessment of background and criticalities‖ (2010) 34

Telecommunications Policy 384-391, p.387.

http://www.hot.net.il/

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significant market power.285

All participants in the consultation, except Telecom

Italia, highlighted the persistence of a low level of competition especially in the

access and broadband segments, in spite of the accounting separation

arrangements already in place.

Against this background, Telecom Italia voluntarily put in place formalised

functional separation arrangements, by creating a separate business unit, Open

Access, to provide access services of an equivalent type and quality to Telecom

Italia‘s retail and wholesale services units.286

This arrangement was

complemented by a series of voluntary undertakings that Telecom Italia

presented to AGCOM, which were aimed at ensuring equal treatment among

Telecom Italia and its competitors in relation to wholesale access. These

commitments are mainly behavioural. Thus, Telecom Italia has undertaken,

inter alia:

Development a new delivery process to manage its relationships with

internal and external customers;

Establishment of a system of incentives and a behavioural code for

employees of Open Access and its wholesale division, geared towards

supporting equal treatment—thus, incentives are linked only to the

achievement of Open Access targets, rather than to the overall

performance of Telecom Italia;

Performance monitoring related to the provision of disaggregated

access services, intended to enhance visibility and transparency;

Creation of an independent board to monitor, report and advise on

implementation of the undertakings, as well as a new access network

dispute settlement body which will mediate between providers and

thereby solve practical operational issues;

Publication of rules of access; and

Adoption of rules on accounting separation and internal access

charges.

285

R.W. Crandall, J.A. Eisenach & R.E. Litan, ―Vertical Separation of

Telecommunications Networks: Evidence from Five Countries‖ (2010) 62(3)

Federal Communications Law Journal 493-539, p.515.

286 OECD, Next Generation Networks and Market Structure: Outline,

DSTI/ICCP/CISP(2010)5, pp.19-20.

http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=DSTI/ICCP/CISP(2010)5

78


The product level equivalence to be put in place by these undertakings can

broadly be classified as ―Equivalence of Outcomes‖. Thus, the regulated

wholesale products offered by the incumbent operator to alternative operators

are comparable to the products it provides to its retail division in terms of

functionality and price, but may be provided by different systems and processes.

In practice, however, many of the systems and procedures used by alternative

operators are the same as those used by Telecom Italia‘s retail division.

The undertakings and the related model of functional separation were

authorised by AGCOM Resolution 718/08/CONS on 11 December 2008, and

published in the Gazetta Ufficiale on 29 December 2008.287

5.8 Telecommunications sector in New Zealand

In November 2005, the New Zealand government launched a ―stocktake‖

of the telecommunications sector in the country, with a particular focus on

broadband development.288

Based on the results of that study, the

Telecommunications Amendment Act was passed in December 2006. This

legislation, inter alia, required the ―robust operational separation‖ of the

vertically integrated, privatised telecommunications incumbent, Telecom New

Zealand (―Telecom‖), into at least three business units, to provide wholesale,

retail and local access services.289

Operational separation did not, however,

require separate ownership of the various separated business units.290

The 2006

Act sets out a threefold purpose for the operational separation of Telecom:

(a) to promote competition in telecommunications markets for the

long-term benefit of end users of telecommunications services

in New Zealand;

(b) to require transparency, non-discrimination, and equivalence

of supply in relation to certain telecommunications services;

and

287

Nucciarelli & Sadowski, cited fn. 284 above, pp.387-390.

288 See Ministry of Economic Development, Stocktake Process, Stakeholder

Input and Supporting Documents (POL/1/27/10/2/1), published 20 April

2006.

289 Telecommunications Amendment Act (No 2) 2006, section 32, inserting a

new Part 2A into the Telecommunications Act 2001.

290 New section 69C of the Telecommunications Act 2001.

79


(c) to facilitate efficient investment in telecommunications

infrastructure and services.291

As mandated by the 2006 Act, a public consultation was held by the

Minister for Communications and Information Technology in order to assess

Telecom‘s proposals for operational separation.292

Following certain

amendment to Telecom‘s original amendment plan, operational separation was

implemented on 31 March 2008.293

Telecom now comprises five customer-

facing business units: a retail unit providing fixed line, mobile and internet

services to consumers and small and medium business customers; an

operationally separate wholesale business unit providing next generation

wholesale network products to service providers; an operationally separate unit

that manages Telecom‘s local access network; a specialised unit that provides

technology services for larger business customers; and an Australian subsidiary

providing telecommunications services in Australia.294

5.9 Telecommunications sector in Poland

Beginning in 2007, the telecommunications regulator in Poland, the

President of the Office of Electronic Communications (Urząd Komunikacji

Elektronicznej, or UKE), began to explore the option of imposing functional

separation on the wholesale operations of the vertically integrated

telecommunications incumbent, Telekomunikacja Polska S.A. (TP).295

Functional separation was provisionally considered appropriate in order to

address the lack of effective competition in the telecommunications sector in

Poland, which was attributed to persistent anti-competitive behaviour by TP that

obstructed the development of its downstream competitors. A report

commissioned by the President of UKE and published in late 2008 took the

view that functional separation could provide an effective remedy to eliminate

291

New section 69A of the Telecommunications Act 2001.

292 See Ministry of Economic Development, Development of Requirements for

the Operational Separation of Telecom. Consultation Document, published 5

April 2007.

293 See Minister for Communications and Information Technology Media

Statement, Telecom Separation a Fact, published 31 March 2008.

294 Further information on Telecom New Zealand is available on its website at

www.telecom.co.nz.

295 UKE press release, Is Functional Separation Necessary?, published 18

January 2008. All UKE press releases cited in this section of the report are

available (also in English) on UKE‘s website at www.en.uke.gov.pl.

http://www.telecom.co.nz/

http://www.en.uke.gov.pl/

80


TP‘s anti-competitive behaviour, provided it was backed up with additional

regulatory measures required to address other market problems. 296

In January 2009, the President of UKE announced that, in light of the

finding of this and other reports, she was formally considering the imposition of

functional separation on TP, with the objective of establishing a separate unit

independent of TP in order to provide wholesale telecommunications

services.297

Structural and behavioural remedies initially offered by TP in the

form of a ―Charter of Equivalence‖ were rejected by the President of UKE as

insufficient to solve the existing competition problems.298

In August 2009, the

President of UKE launched a public consultation on the appropriateness of

functional separation as a remedy to be imposed on TP.299

In September 2009,

shortly before the public consultation closed, TP submitted a revised ―Charter

of Equivalence‖ to the President of UKE, which was intended to correct the

deficiencies of its earlier proposal.300

On 22 October 2009, the parties

announced an agreement whereby TP undertook to honour its existing

regulatory obligations, as well as take a range of actions to ensure equal

treatment of all market participants. These included, inter alia, commitments to

separate out its wholesale unit, to ensure personnel did not engage in

discriminatory behaviour and to achieve transparency. However, functional

separation per se, requiring an entirely independent wholesale division, was not

mandated. TP also committed to significant investment in its broadband

network over the following three years.301

In July 2010, the President of UKE launched a further consultation process

amongst market participants, for the purposes of determining whether the 2009

agreement had been successful in addressing the market problems identified

296

UKE press release, The Report on Legitimacy of TP SA‘s separation,

published 26 November 2008.

297 UKE press release, Functional Separation of TP, published 21 January 2009.

298 UKE press release, Summary of Consultations on the Charter of Equivalence,

published 8 July 2009. This document contained a substantial discussion of

the deficiencies of TP‘s initial separation proposal and why it failed to

address the regulator‘s concerns.

299 UKE press release, Consultations on the Appropriateness of Functional

Separation of TP, published 24 August 2009.

300 UKE press release, The President of UKE gets new version of Charter of

Equivalence from TP, published 11 September 2009.

301 UKE press release, The agreement between TP SA and the President of UKE,

published 22 October 2009.

81


previously, in particular the need for equal treatment, or whether conversely

formal functional separation is required. The stated outcome of this process is

the publication of a report that will allow the regulator to come to a decision

regarding future required actions in this area.302

In June 2011, the European Commission imposed a fine of more than €127

million on TP for abuse of its dominant market position, contrary to Article 102

TFEU. In particular, the Commission condemned TP‘s efforts to prevent or

delay the entry of competitors into Poland‘s broadband market, through its

failure to make available access to its fixed network and wholesale broadband

services. The abuse itself comprised various activities: that ―TP proposed

unreasonable conditions, delayed the negotiation processes, rejected orders in

an unjustifiable manner and refused to provide reliable and accurate

information to alternative operators.‖ The Commission Decision also requires

TP to put an end to any on-going anticompetitive conduct, and to refrain from

engaging in such practices in the future.303

5.10 Telecommunications sector in Slovenia

Slovenia acceded to the EU in 2004 and thus is subject to the requirements

of its telecommunications framework.304

Both LLU and an obligation to provide

wholesale bitstream access have been introduced in Slovenia, with considerable

success. The Slovenian government has taken the position that functional

separation in the telecommunications sector is unlikely, on the basis that

competition in the sector has increased considerably in the last two years.305

302

UKE press release, Invitation to the assessment of the functioning of the

Agreement between TP and UKE, published 13 July 2010.

303 See Commission Press Release, IP/11/771 Antitrust: Commission fines

Telekomunikacja Polska S.A € 127 million for abuse of dominant position,

published 22 June 2011. The full text of the Decision has not yet been

published.

304 See European Commission Staff Working Document accompanying the

Communication from the Commission to the European Parliament, the

Council, the European Economic and Social Committee and the Committee

of the Regions, Progress Report on the Single European Electronic

Communications Market (15th

Report), published 25 May 2010

(COM(2010)253), pp.365-376, for a review of Slovenia‘s progress in

implementing these requirements.

305 KPMG Report, cited fn. 262 above, pp.27-28.

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Functional separation is viewed as an extreme option, to be considered only if

all other measures were insufficient.306

5.11 Telecommunications sector in Sweden

Functional separation of the incumbent telecommunications provider in

Sweden, TeliaSonera, has occurred on what has been described as a ―quasi-

voluntary‖ basis.307

In 2007, the Swedish telecommunications regulator, the

Post and Telecom Agency (PTS), was tasked by the government with an

assessment of the electronic communications sector, in order to improve

transparency and equal treatment in the market. PTS proposed legislative

changes which included the power to impose functional separation on

TeliaSonera in relation to (at least) those assets used to provide local loop

products. Following a consultation process, these proposals were adopted by the

Parliament, and legislation giving PTS the power to impose functional

separation entered into force on 1 July 2008.

Concurrently with the legislative procedure, however, TeliaSonera

voluntarily engaged in functional separation by creating a wholly-owned

subsidiary, Skanova Access AB, on 1 January 2008. The main function of

Skanova is to sell wholesale access to copper-related infrastructure on the same

commercial terms to all operators on the Swedish market, including TeliaSonera

itself. Management of TeliaSonera‘s fibre network has also been entrusted to

Skanova. TeliaSonera has pledged equal treatment for all customers, including

the establishment of an Equality of Access Board with external members to

monitor and report on equal treatment issues.308

Most likely as a result of

TeliaSonera‘s voluntary compliance, compulsory functional separation has not

been introduced by PTS under the legislation in force since July 2008.

5.12 Telecommunications sector in Switzerland

Although structural separation has not been introduced for the

telecommunications sector in Switzerland, and local loop unbundling was

mandated only in 2007, three features of the sector are worthy of note.309

306

KPMG Report, cited fn. 262 above, p.33.

307 Berkman Report, cited fn. 18 above, p.313.

308 Berkman Report, cited fn. 18 above, pp.312-313, and O. Teppayayon & E.

Bohlin, ―Functional Separation in Swedish Broadband Market: Next Step of

Improving Competition‖ (2010) 34 Telecommunications Policy 375-383.

309 Berkman Report, cited fn. 18 above, pp.314-324.

83


Firstly, intermodal competition in broadband provision has been particularly

strong in Switzerland, between the incumbent majority government-owned

telecommunications company that offers DSL, Swisscom, and cable companies.

Secondly, small utility companies in Switzerland have also entered the

broadband market, investing in fibre-to-the-home (FTTH) networks. In

response, Swisscom in 2008 announced plans to invest in its own FTTH

network, which will involve the deployment of four fibres to each home. One of

these fibres will be used by Swisscom, and the other three can be bought or

rented by other providers. Swisscom has already entered into a nation-wide

agreement with Sunrise, its strongest competitor, under which Sunrise will buy

Swisscom‘s wholesale fibre products. Thirdly, the Swiss telecommunications

regulator, ComCom, initiated a series of roundtable talks on FTTH between

market participants, in order to co-ordinate plans for broadband development.

By October 2009, participants had agreed on common technical standards for

fibre deployment, which will facilitate customer switching between providers.

5.13 Telecommunications sector in the United Kingdom

In September 2005, Ofcom, the telecommunications regulator in the

United Kingdom, accepted a series of legally binding undertakings from the

incumbent vertically integrated telecommunications provider, BT.310

The

undertakings, comprising both behavioural and structural commitments that

amounted to functional separation of BT, were provided by the firm pursuant to

the domestic competition rules, the Enterprise Act 2002, rather than under the

sector-specific telecommunications regulations. On the basis of these

undertakings, BT agreed, inter alia, to separate its delivery and systems

functions, and to put in place an equality of access regime for its wholesale

network products. Equality of access has two dimensions: delivery of certain of

BT‘s wholesale products and services on an ―equivalence of inputs‖ (EOI)

basis, and secondly, the putting in place of management changes within BT to

support equivalence at the product level.311

The EOI standard requires that BT must consume exactly the same access

and wholesale products and on the same terms as its competitors. This required

310

See J. Whalley & P. Curwen, ―Equality of access and local loop unbundling

in the UK broadband telecommunications market‖ (2008) 25 Telematics and

Informatics 280-291 for an account of the process, with a review of the initial

stages of implementation.

311 Ofcom, Final statements on the Strategic Review of Telecommunications,

and undertakings in lieu of a reference under the Enterprise Act 2002,

published 22 September 2005, paragraph 4.9.

84


the creation of a new organisation for the provisions of network access services,

Openreach, which is operationally distinct from the rest of the BT Group, as

well as the separation of BT‘s upstream service provider, BT Wholesale. BT

undertook to alter its employee incentive structures (e.g. bonuses, long term

incentive plans) to ensure that all incentive remuneration of BT employees

working for its Openreach or BT Wholesale divisions would reflect only the

incentives of Openreach or BT Wholesale, respectively. Moreover, employees

of Openreach are not permitted to work for other divisions within the BT group,

save with the written approval of Ofcom.312

In this manner, the functional

separation of BT put in place by the undertakings sought to duplicate the effects

of a full legal separation, yet without a change in the ultimate ownership of the

group. An Equivalence of Access Board, supported an administrative division

called the Equivalence of Access Office, has also been established, which is

tasked with monitoring, reporting and advising BT on its compliance with the

objectives. Provision has also been made for the possibility of variation of the

undertakings by mutual agreement between BT and Ofcom.313

In May 2009, Ofcom published an implementation review of the process

and the results of BT‘s functional separation.314

The review suggests that the net

effects of the separation process, to date, have been positive.315

Openreach has

made good progress in becoming a functionally independent entity.316

Increased

competition in the broadband sector has brought substantial benefits, including:

Increased take-up of new services and packages;

Greater affordability and value for money;

Increased consumer engagement with fixed telecommunications

services;

Growing levels of switching in broadband; and

312

Ofcom, Strategic Review, cited fn. 311 above, at Annex A: Undertakings

given to Ofcom by BT pursuant to the Enterprise Act 2002, particularly

sections 5 and 6.

313 Ofcom, Strategic Review, cited fn. 311 above, at Annex A: Undertakings

given to Ofcom by BT pursuant to the Enterprise Act 2002, section 18.

314 Ofcom, Impact of the Strategic Review of Telecoms, Implementation Review,

published 29 May 2009.

315 Ofcom, Implementation Review, cited fn. 314 above, p.3.


85


High satisfaction levels among residential broadband customers,

although business customers tended to be less satisfied.317

At the same time, communications providers have continued to make

significant investment in delivering LLU-based services, while BT has been

investing in its next generation core network.318

On the other hand, the review

documents some less successful aspects of the separation process, in particular

Openreach‘s approach to product development and its implementation of

systems separation.319

Moreover, the review cautions that the positive results

should not be attributed, solely, to the separation process, as other potentially

relevant changes occurred in the telecommunications sector at the same time

(e.g. creation of the Office of the Telecommunications Adjudicator).320

The Ofcom report concludes that the functional separation arrangement

agreed with BT in 2005 remains ―an appropriate and comprehensive solution to

the competition concerns‖ identified by Ofcom previously. In view of the

evolving nature of the telecommunications sector, however, the report notes the

necessity of continually reviewing the arrangement, in order to determine

whether and how it may need to be adapted.321

6. Developments in rail


developments with respect to structural and behavioural separation in the rail

sector in OECD Member countries and the EU. While the focus of the

Recommendation is on structural separation, experiences with behavioural


order to focus on the most significant developments, not all countries are listed

6.1 Rail sector in Australia

Vertical separation and open access to rail infrastructure in Australia has

occurred at both state and federal levels, through a variety of mechanisms.

317

Ofcom, Implementation Review, cited fn. 314 above, pp.4-5.

318 Ofcom, Implementation Review, cited fn. 314 above pp.6, 33-35.


320 Ofcom, Implementation Review, cited fn. 314 above, pp.4, 14.


86


6.1.1 Access undertakings

At the federal level, the Australian Rail Track Corporation (ARTC) is a

federal government-owned agency, created in 1997, which is intended to

provide a ―one-stop shop‖ for rail transport undertakings that wish to access the

interstate rail network. ARTC owns a number of interstate railway lines and

leases others from the Victoria and New South Wales governments, managing,

developing, maintaining and operating this infrastructure. ARTC also has a

wholesale agreement in place that allows it to sell access on several interstate

lines in Western Australia. The remainder of the interstate railway lines are

controlled by various state government agencies, with one line, the Alice Spring

to Darwin line, controlled by a private sector consortium. As of November

2010, there were nine major railway transport undertakings operating on

ARTC-owned or -leased railway lines. Operators pay a two-part charge for

access to these lines, comprising a fixed component based on capacity usage

and a variable component based on the tonnage of the train plus distance

travelled.322

The ARTC is itself regulated by the Australian Competition & Consumer

Commission (ACCC), under Part IIIA of the Trade Practice Act 1974. Pursuant

to this legislation, the ARTC is required to submit undertakings regarding

access conditions to the ACCC, which has the power to reject or require

revisions to the access undertakings where it considers it necessary to do so.323

6.1.2 Declarations of mandatory access

Part IIIA of the Trade Practices Act 1974 also makes provision for the

granting of mandatory third party rights of access to certain facilities. The

infrastructure concerned must be of national importance, have natural monopoly

characteristics and access must be essential in order to promote a material

increase in competition in the relevant market. The facility is then subject to a

―declaration‖ by the relevant minister. Where the parties concerned are

subsequently unable to agree access conditions, the ACCC is empowered to

322

This information is taken from the ARTC‘s website, available at

www.artc.com.au.

323 Further information on the ACCC‘s functions in relation to access

undertakings is available on its website at www.accc.gov.au. For an example

of a modified access undertaking offered by ARTC, following an indication

for the ACCC that it planned to reject the ARTC‘s original proposal, see

ACCC, Consultation Paper in relation to the Australian Rail Track

Corporation‘s proposed Hunter Valley Rail Network Access Undertaking,

published 16 September 2010 and available on the ACCC‘s website.

http://www.artc.com.au/

http://www.accc.gov.au/

87


decide the dispute by making a determination.324

This provision has been

invoked by a small mining company, the Fortescue Metals Group, which

operates in the Pilbara region of Western Australia, in a bid to gain access to

four vertically integrated, privately-owned railway lines in the area. Two of the

lines concerned are owned by BHP Billiton and two by Rio Tinto, both large

mining conglomerates with operations in the Pilbara area. Following a

recommendation from the National Competition Council, the designated

minister declared all four lines to be essential facilities under Part IIIA. On

appeal, however, the Australian Competition Tribunal (ACT) overturned the

declaration as regards two of these lines, one owned by BHP Billiton and the

other by Rio Tinto. With respect to those particular rail lines, which carry the

bulk of the two companies‘ production from the area, the ACT held that the

public interest in avoiding unnecessary duplication of the facilities was

outweighed by the costs of granting access, in particular in terms of disruption

to BHP Billiton and Rio Tinto in the companies‘ own use of their respective

facilities. Conversely, on the other two rail lines, which are used less frequently,

the benefits of granting access outweighed the costs. Notably, in the concluding

remarks to its judgment, the ACT made reference to the considerable length of

time required to complete access procedures under Part IIIA. It suggested that,

while the objective of community welfare pursued by Part IIIA remains of great

relevance, the structure of the legislation itself may benefit from reform.325

6.1.3 Privatisation

The last remaining state-owned, vertically integrated rail company in

Australia, Queensland Rail, is currently undergoing a process of reorganisation

and part-privatisation. As of 1 July 2010, the company was split into two

entities: QR National, which comprises the national rail freight operations of

QR together with the 2300km central Queensland heavy-haul coal network and

supporting maintenance services,326

and a new entity retaining the name

Queensland Rail, which has responsibility for non-coal freight operations and

passenger services within the state, together with infrastructure and

324

See ACCC, Arbitrations: A guide to resolution of access disputes under Part

IIIA of the Trade Practices Act 1974, April 2006, for further information on

the declaration procedure. For a more critical view of the procedure under

Part IIIA, see H. Ergas, ―An Excess of Access: An Examination of Part IIIA

of the Australian Trade Practices Act‖ (2009) 16(4) Agenda 37.

325 In the matter of Fortescue Metals Group Limited [2010] ACompT 2

(judgment of 30 June 2010).

326 Further information on QR National is available on its website at

www.qrnational.com.au.

http://www.qrnational.com.au/

88


maintenance.327

The intention of the Queensland government was to privatise

QR National as a vertically integrated company, while Queensland Rail would

remain a vertically integrated state-owned corporation.328

This proposal

received considerable criticism from business and the federal government, in

particular because of the decision to retain QR National‘s vertically integrated

structure on privatisation.329

Nonetheless, QR National‘s initial public offering

took place in November 2010.330

6.2 Rail sector in Belgium

On 1 January 2005, the State-owned, formerly vertically integrated rail

company in Belgium, SNCB/NMBS,331

re-organised in order to introduce a

degree of functional separation in line with EU law requirements. A holding

company, SNCB-Holding, was created, which has two subsidiary companies:

Infrabel, which develops, maintains and operates the rail infrastructure, and

SNCB, which operates passenger and freight rail transport services.332

6.3 Rail sector in Canada

Canada has two major transcontinental railway systems, which are owned

and operated by two separate private companies, the Canadian National

Railway (CN) and the Canadian Pacific Railway (CP), respectively. In addition,

both CN and CP operate freight rail services on their respective networks.333

327

Further information on Queensland National is available on its website at

www.queenslandrail.com.au.

328 ―QR National IPO seeks to defy stagnant markets‖, 50(8) International

Railway Journal, August 2010, p.20. See also Financial Times, ―QR

National looks to raise A$5bn in IPO‖, published 10 October 2010.

329 See, for example, The Courier-Mail, ―Fraser hits back over Ferguson's QR

privatisation ―disaster‖ claims‖, published 25 March 2010, and ―Coal miners

mount $A 4.85 billion bid to head-off QR privatisation‖ 50(7) International

Railway Journal, July 2010, p.8.

330 Financial Times, ―QR National Climbs on Trading Debut‖, published 21

November 2010.

331 The name of the Group is Société Nationale des Chemins de fer Belges

(SNCB) in French and Nationale Maatschappij der Belgische Spoorwegen

(NMBS) in Flemish.

332 Further information on the SNCB/NMBS Group is available on its website at

www.b-rail.be.

333 Further information on CN is available on its website at www.cn.ca. Further

information on CP is available on its website at www.cpr.ca.

http://www.queenslandrail.com.au/

http://www.b-rail.be/

http://www.cn.ca/

http://www.cpr.ca/

89


Nation-wide passenger rail services are provided by VIA Rail Canada, a Crown

corporation (State-owned company providing commercial services), over the

networks that are owned and operated by CN and CP.334

The rail sector in

Canada is regulated by the Canadian Transportation Agency, an independent

administrative tribunal, which also acts as economic regulator for the air and

marine transport sectors.335

The current regulatory structure, under the Canada Transportation Act

(CTA), appears to envisage mainly competition between different railway

networks for freight transport, which is facilitated by switching at interchange

points on the lines.336

While the CTA also gives the Canadian Transportation

Agency the power to impose regulated running rights over a railway network,

the regulator has construed this power very narrowly—available only as an

exceptional measure where there is evidence of market failure or abuse—and so

the regulated running rights provisions are not currently in use. Nonetheless, a

number of commercially-negotiated running rights agreements are in place.337

In April 2008, the Canadian government launched a review of the

functioning of the freight rail sector in Canada, focusing primarily on the

quality of the services received by shippers.338

In its final report, provided to the

Minister of State (Transport) in December 2010, the review panel concluded

that while railway deregulation in Canada has been a success for the most part,

significant market problems exist. The panel explained there were significant

service problems identified during the two-year study period. Although the

railways have taken steps to address these issues, problems still exist. The

panel added that these service problems affect not only individual shippers but

also particular sectors and regions of the country.339

In seeking to remedy these

service issues, the review panel considered the need to balance the interests of

334

Further information on VIA Rail Canada is available on its website at

www.viarail.ca.

335 Further information on the Canadian Transportation Agency is available on

its website at www.otc-cta.gc.ca.

336 Transport Canada, Rail Freight Service Review – Interim Report, TP 15042,

published October 2010, p.7-8. See also Rail Freight Service Review – Final

Report, TP 15042, published January 2011.

337 Rail Freight Service Review – Interim Report, cited fn. 336 above, p.9.

338 Transport Canada Press Release, Promised Rail Freight Service Review

Begins, published 7 April 2010.

339 Transport Canada, Rail Freight Service Review – Final Report, TP 15042,

published January 2011, pp.45.

http://www.viarail.ca/

http://www.otc-cta.gc.ca/

90


various stakeholder groups, including the overall interests of the Canadian

economy.340

The final report recommends a commercial approach that aims to

improve rail service through four commercial measures which are not legally

binding. They are:

Railways should provide 10 days advance notice of service changes.

Railways and stakeholders should negotiate service agreements.

A fair, timely and cost-effective commercial dispute resolution

mechanism should be developed.

Supply chain performance should be monitored through enhanced

bilateral performance reporting between shippers and railways, and

through public performance reporting.

The panel recommended that two facilitators (one to develop a commercial

dispute resolution process and a second to develop the metrics for public

performance reporting) be appointed to work with stakeholders for six months

and report back to the Minister on the success of the commercial measures and

potential solutions.341

If key issues were not resolved and the commercial

approach were to fail, the Panel provided legislative fallback provisions for each

of the commercial measures, which it believed the Minister should implement if

recommended by the facilitators.342

In its March 18, 2011 response to the review, the Canadian government

announced that it accepted the panel‘s commercial approach and intends to

implement the following steps to improve performance across the supply chain:

Initiate a six-month facilitation process with shippers, railways and

other stakeholders to negotiate a template service agreement and

streamlined commercial dispute resolution process.

In support of the commercial measures proposed by the panel, table a

bill to give shippers the right to a service agreement with the railways.

340

Rail Freight Service Review – Final Report, pp.37.

341 Rail Freight Service Review – Final Report, pp.48-56.

342 Rail Freight Service Review – Final Report, pp.56-61.

91


Establish a Commodity Supply Chain Table to provide a forum to

address issues that affect the freight logistics system and develop

public supply chain performance metrics.

In collaboration with Agriculture and Agri-Food Canada, Transport

Canada would lead an in-depth analysis of the grain supply chain to

focus on issues that affect that sector and identify potential

solutions.343

In summary, the government‘s response combines a commercial approach,

supported by a proposed bill to give shippers the right to a service agreement

and takes a broader supply chain perspective to continue addressing logistical

issues and develop public performance metrics. This approach was considered

the best way to achieve timely, flexible and customized solutions, improve

relationships and enhance the effectiveness, efficiency and reliability of the

entire rail freight supply chain.

6.4 Rail sector in Chile

While reasonably extensive in the past, the Chilean rail network has

suffered greatly as a result of competition from other modes of transport (road

and air). The majority of the rail infrastructure in Chile is operated and

maintained by the State-owned railway company, Empresa de los Ferrocarriles

del Estado (EFE). EFE has been subject to a degree of functional separation,

with the result that passenger services are now provided by four subsidiary

companies that operate on a regional basis: Metro Regional de Valparaíso S.A.,

through its service Merval; Trenes Metropolitanos S.A., through its service

Metrotren; Servicio de Trenes Regionales Terra S.A., through its service

TerraSur; and Ferrocarriles Suburbanos de Concepción S.A., through its service

Fesub.344

Several railway lines are operated by other companies, for example

the State mining undertaking, Codelco. The narrow gauge network in the north

of the country was privatised in 1997, and its owner, Ferronor, operates both the

infrastructure and transport services on the line.345

Furthermore, freight services

in the south of the country are run by concessionaires, with only the

343

Transport Canada Press Release, Government of Canada Acts to Improve

Rail Supply Chain (Winnipeg), published 18 March 2011. 344

Further information on EFE and its subsidiary companies is available on its

website at www.efe.cl.

345 ―Getting EFE Back on Track‖, 50(1) International Railway Journal, January

2010, p. 36. Further information on Ferronor is available on its website at

www.ferronor.cl.

http://www.efe.cl/

http://www.ferronor.cl/

92


infrastructure operated by EFE.346

EFE has suffered serious financial difficulties

in recent years, and by 2007 was on the brink of bankruptcy.347

In reorganising

to address these problems, EFE has increasingly taken the form of a holding

company.348

6.5 Rail sector in Estonia

In 2001, the largest Estonian railway operator, Eesti Raudtee (EVR), was

privatised together with its rail infrastructure. However, the sector was not

liberalised, so that while the private infrastructure owner provided access, this

was not required to be on a transparent nor non-discriminatory basis—resulting,

in essence, in a private monopoly. In January 2007, the rail operator was re-

nationalised when the Estonian State bought back the shareholding of the

private rail operator, with the result that EVR is now once again a wholly State-

owned company.349

Functional separation of EVR took place in January 2009,

with the creation of two wholly owned subsidiary companies: AS EVR Infra,

which maintains and operates the rail infrastructure owned by EVR, and AS

EVR Cargo, which provides freight services on the network.350

About 75% of rail services in Estonia involve freight transport. Passenger

transport services, which comprise the remaining 25% of services, are provided

by three undertakings: Edelaraudtee AS, a private company which provides

domestic passenger and freight services and which, in addition, owns and

operates 300km of the rail network in Estonia;

351 the State-owned company

Elektriraudtee AS, which provides passenger services in the region around

346

―Getting EFE Back on Track‖, cited fn. 345 above.

347 ―An Ill Wind Blows for EFE‖, 47(6) International Railway Journal, June

2007.

348 ―Getting EFE Back on Track‖, cited fn. 345 above.

349 IBM, Rail Liberalisation Index 2007, published Brussels, 17 October 2007,

p.115.

350 Information on the restructuring of EVR, which took place on 14 January

2009, is available on EVR‘s website at www.evr.ee. See also ―Estonia to

Split Operations from Infrastructure‖, 47(11) International Railway Journal,

November 2007, p.8.

351 Further information on Edelaraudtee is available on its website at

www.edel.ee.

http://www.evr.ee/

http://www.edel.ee/

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Tallinn;352

and GoRail, a private company which provides international

passenger services between Tallinn and Moscow.353

6.6 Rail sector in the European Union

Vertical separation between railway undertakings providing transport

services and rail infrastructure managers is a key aspect of the rail liberalisation

programme that has been pursued by the EU, and which has had a significant

impact on the structure of the rail sector in EU Member States. Council

Directive 91/440/EEC of 29 July 1991 on the development of the Community‘s

railways354

mandated accounting separation between railway undertakings and

infrastructure managers, as well as a requirement of access to infrastructure

under equitable conditions in other Member States for railway undertakings and

groups of undertakings providing international passenger and/or freight

transport services. The First Railway Package of 2001—comprising Directives

2001/12/EC, 2001/13/EC and 2001/14/EC—considerably expanded and

strengthened this regime:

Directive 2001/12/EC355

strengthened the requirements for access to

infrastructure on a non-discriminatory basis, and accounting

separation requirements between railway undertakings and

infrastructure managers.


set down criteria for the licensing of railway

undertakings on a non-discriminatory basis.


covered, inter alia, non-discriminatory access

to various services set out in Annex II of the directive, in practice

352

Elektriraudtee was separated from EVR in 1998. Further information on the

company is available on its website at www.elektriraudtee.ee.

353 Further information on GoRail is available on its website at www.gorail.ee.

354 OJ L 237/25, 24.8.1991.


February 2001 amending Council Directive 91/440/EEC on the development

of the Community‘s railways (OJ L 75/1, 15.3.2001).

356 Directive 2001/13/EC of the European parliament and of the Council of 26

February 2001 amending Council Directive 95/18/EC on the licensing of

railway undertakings (OJ L 75/26, 15.3.2001).


February 2001 on the allocation of railway infrastructure capacity and the

http://www.elektriraudtee.ee/

http://www.gorail.ee/

94


necessary to exercise the right of access to infrastructure; incentives to

encourage efficient performance by railway undertakings and

infrastructure managers; fair and non-discriminatory capacity

allocation; and the principles of charging for access to infrastructure.

In the view of the European Commission, ―the development of EU rail

market access legislation has progressively encouraged market opening based

on a genuine separation between infrastructure management and transport

operations.‖358

Thus, pursuant to Directive 2004/51/EC, the market for

international freight services was opened to competition from January 2006 on,

while the market for all types of rail freight services was opened to competition

from January 2007 on.359

The market for international passenger services—

meaning train services crossing at least one border of a Member State, where

the principal purpose is to carry passengers between stations located in different

Member States—was fully opened to competition from January 2010 on.360

Nonetheless, in spite of the vertical separation requirements that have already

been put in place, the establishment of a fully open rail market within the EU

has proven difficult to achieve in practice. A Communication from the

Commission in 2010 on the rail sector highlighted some of the difficulties that

persist, including problems regarding non-discriminatory and transparent access

to rail infrastructure, a lack of independence on the part of national rail

regulators and difficulties in securing investment in rail.361

Liberalisation of the

domestic passenger sector has progressed particularly slowly.

levying of charges for the use of railway infrastructure and safety

certification (OJ L75/29, 15.3.2001).

358 Communication from the Commission concerning the development of a

Single European Railway Area, COM(2010) 474 final, published 17

September 2010, p.6.

359 Directive 2004/51/EC of the European Council and of the Parliament of 29

April 2004 amending Council Directive 91/440/EEC on the development of

the Community's railways (OJ L 164/164, 30.4.2004).


October 2007 amending Council Directive 91/440/EEC on the development

of the Community‘s railways and Directive 2001/14/EC on the allocation of

railway infrastructure capacity and the levying of charges for the use of

railway infrastructure (OJ L 315/44, 3.1.2007).

361 Communication from the Commission on Single European Railway Area,

cited fn. 358 above.

95


The Commission has adopted a two-pronged approach to address the

market problems that remain within the rail sector. Firstly, it has initiated formal

legal proceedings before the Court of Justice in 2010 against 13 Member States

on the basis that each has failed to implement fully the requirements of the First

Rail Package.362

Secondly, the Commission in September 2010 published its

proposal for a Directive establishing a Single Rail Area in the EU, which would

consolidate and amend the existing legislation in this area—promising

clarification to aid transposition and efficient implementation by the Member

States, legal simplification through consolidation and modernisation of the current

provision where necessary.363

In particular, the proposed Directive seeks to

address the three key problem areas remaining within the rail sector:

In order to increase competition in the rail market, the proposed

Directive would require, inter alia, improved access to rail-related

facilities such as maintenance facilities, terminals, and passenger

information and ticketing facilities; establishment of explicit rules on

conflict of interest and discriminatory practices in the rail sector; and

more publication of detailed ―network statements‖ on the availability

of rail infrastructure and conditions of use.

In order to strengthen the powers of national rail regulators, the

proposed Directive would require, inter alia, extension of the

competence of national regulator to rail-related services; greater

independence of regulators from other public bodies; and general

enhancement of the powers of regulators with respect to e.g.

sanctions, auditing and investigatory powers.

In order to increase investment in the rail sector, the proposed

Directive would, require, inter alia, more precise and smarter

362

See European Commission Press Release, IP/10/807 Rail services:

Commission legal action against 13 Member States for failing to fully

implement first railway package, published 24 June 2010. Prior to initiation

of formal proceedings against the 13 Member States concerned, the

Commission had in 2008 sent formal notices to 24 Member States regarding

their failures to implement the First Rail Package correctly; see European

Commission Press Release, IP/08/1031 Commission calls on Member States

to ensure correct implementation of the First Rail Package, published 26

June 2008.

363 European Commission, Proposal for a Directive of the European Parliament

and of the Council establishing a single European railway area (Recast),

SEC(2010) 1043&1042, COM(2010) 475 final, published 17 September

2010, pp.4-5.

96


infrastructure charging rules, as well as long-term strategies between

Member States and infrastructure managers aimed at improving

performance and ensuring greater predictability on the development of

infrastructure.364

The Commission now plans to launch a consultation on the proposed

measures for the rail sector.

In addition the European Commission has complemented its infringement

proceedings and regulatory actions by conducting two antitrust investigations

and in particular by carrying out unannounced inspections in March 2011.365

6.7 Rail sector in France

The railway sector in France is dominated by two State-owned

enterprises:366

Réseau Ferré de France (RFF), which is the owner and manager

of the rail infrastructure,367

and SNCF, which is France‘s principal rail transport

services provider. As of 2010, SNCF has been divided into five groups, as

follows: SNCF Infra, providing infrastructure maintenance services; SNCF

Proximités, providing regional and metropolitan passenger transport; SNCF

Voyages, providing long-distance passenger services; SNCF Geodis, providing

freight transport services; and Gares & Connexions, which develops and

364

See European Commission Press Release, IP/10/1139 Commission sets out

measures to improve rail services, published 17 September 2010, as well as

the Explanatory Memorandum to the proposed Directive, cited fn. 363 above.

365 In one case the companies involved are active in the rail freight sector in

Baltic countries and the suspected conducts relate to possible violation of EU

competition rules that prohibit cartels and restrictive business practices

and/or the abuse of a dominant market position (respectively Articles 101 and

102 of the Treaty on the Functioning of the European Union). In the other

case, the investigation concerns Deutsche Bahn AG and some of its

subsidiaries and the alleged anticompetitive behaviour relates to the fact that

Deutsche Bahn Energie, the de facto sole supplier of electricity for traction

trains in Germany, would be giving preferential treatment to the group's rail

freight arm, in breach of the rules prohibiting the abuse of a dominant market

position (Article 102 of the Treaty on the Functioning of the European

Union). The fact that the Commission carried out such inspections does not

mean that the companies are guilty of anti-competitive behaviour nor does it

prejudge the outcome of the investigations themselves.

366 In French, both undertakings are classified as an établissement public à

caractère industriel et commercial.

367 Further information on RFF is available on its website at www.rff.fr/fr.

http://www.rff.fr/fr

97


manages the French rail network‘s train stations, as SNCF has retained

ownership of these facilities.368

Although RFF has been the legal owner and

operator of the rail infrastructure in France since 1997, it still contracts out most

of the maintenance functions to SNCF, these services being provided by SNCF

Infra.369

Railway safety issues are dealt with by the Établissement public de

sécurité ferroviaire (EPSF), which is a public administrative body under the

auspices of the Minister for Transport.370

As of November 2010, 11 rail

companies offered freight and/or passenger services on the French rail network,

including SNCF.371

Prior to 2009, and in conformity with Directive 2001/14/EC, the regulatory

function for the rail sector in France was located within the government.372

By

law of 8 December 2009,373

however, a legally and financially-independent rail

regulator has been created, the Autorité de régulation des activités ferroviaires

(ARAF). The objective of the regulator is to ensure access to rail infrastructure

on a fair and non-discriminatory basis, in order to fully open the sector to

competition. Operators that feel they have been discriminated against will have

a right of appeal to ARAF, which will have investigatory and sanctioning

powers in this regard. ARAF will also regulate access charges to be levied by

RFF. It is envisaged that the structure of the agency will resemble that of the

French energy regulator, with a college of seven commissioners, supported by a

secretariat.374

368

Further information on SNCF is available on its website at www.sncf.com.

369 See C.A. Nash, ―Passenger Railway Reform in the Last 20 Years – European

Experience‖ (2008) 22 Research in Transportation Economics 61, p.63.

370 See EPSF‘s website at www.securite-ferroviaire.fr/fr for further information.

371 Figure taken from RFF‘s website at www.rff.fr/fr, last accessed February

2011.

372 See Nash, cited fn. 369 above, p.65.

373 Loi n° 2009-1503 du 8 décembre 2009 relative à l'organisation et à la

régulation des transports ferroviaires et portant diverses dispositions relatives

aux transports.

374 See the fact-sheet issued by the Direction General des Infrastructures, des

Transports et de la Mer, L‘Autorité de regulation des activités ferroviaires

(ARAF), published March 2010, available at www.developpement-

durable.gouv.fr. See also ―France creates independent regulator‖, 50(1)

International Railway Journal, January 2010, p.5.

http://www.sncf.com/

http://www.securite-ferroviaire.fr/fr

http://www.rff.fr/fr

http://www.developpement-durable.gouv.fr/

http://www.developpement-durable.gouv.fr/

98


6.8 Rail sector in Germany

The State-owned, incumbent rail undertaking in Germany, Deutsche Bahn

AG, is generally regarded as having retained its status as a vertically integrated

company.375

Nevertheless, since rail reforms in 1994 it has taken the form of a

holding company, with distinct sub-divisions at the upstream level—DB Netze

for the network and DB Station & Service for the stations—and at the

downstream level, with companies providing long distance, regional, urban and

freight transport services.376

Although currently Deutsche Bahn remains wholly

owned by the Federal Republic, privatisation of (at least part of) the Group has

been on the political agenda for several years, albeit the issue is highly

controversial politically. In January 2006, a report commissioned by the federal

government and produced by Booz Allen Hamilton and industry experts was

published, which evaluated five possible structural models for privatisation. 377

While the federal government had intended to pursue a partial privatisation of

Deutsche Bahn via IPO in 2008, the global financial crisis resulted in the

postponement of that plan. In February 2010, the Transport Minister ruled out

privatisation of Deutsche Bahn as long as this step is not warranted by capital

markets.378

6.9 Rail sector in Israel

The railway sector in Israel remains wholly vertically integrated, with a

single State-owned company, Israel Railways, carrying out the development,

management, maintenance and operation of the railway infrastructure, as well as

the provision of passenger and freight transport services.379

375

R. Lalive & A. Schmutzler, ―Entry in Liberalized Railway Markets: The

German Experience,‖ (2008) 7(1) Review of Network Economics 37, p.40.

376 Lalive & Schmutzler, cited fn. 375 above, p.40-41; see also Nash, cited fn.

369 above. The most up-to-date information on the structure of the Deutsche

Bahn Group is available on its corporate website at www.deutschebahn.com.

377 Booz Allen Hamilton, Privatisierung der Deutschen Bahn ―mit und ohne

Netz ― (in English, Privatisation Options for Deutsche Bahn ―With and

Without Network‖, published January 2006.

378 Reuters, ―German Minister says no Deutsche Bahn IPO for now‖, published

11 February 2010.

379 Further information on Israel Railways is available on its website at

www.rail.co.il.

http://www.deutschebahn.com/

http://www.rail.co.il/

99


6.10 Rail sector in Italy

As in Germany, legal separation of the State-owned former incumbent rail

undertaking in Italy has taken place via a holding company, in order to comply

with EU law requirements. Ferrovie dello Stato (FS) was incorporated in 2001,

with two principal wholly owned subsidiary companies: Trenitalia, providing

transport services, and Rete Ferroviaria Italiana (RFI), which is the rail

infrastructure manager in Italy. A subsidiary company of RFI, Treno Alta

Velocità SpA, has responsibility for the development of the high-speed network

in Italy.380

A privately-owned company, Nuovo Trasporto Viaggiatori (NTV),

plans to commence open access services on the Italian high-speed rail network

from September 2011 on. The French incumbent rail transport undertaking,

SNCF, has a 20% shareholding in NTV. The planned market entry by NTV is

on a considerable scale, involving 25 sets of trains.381

At present in the domestic passenger sector there are two companies that

compete, albeit on a small scale, with Trenitalia: (i) Arenaways, which operates

on the Milan-Turin route and (ii) a joint venture between Deutsche Bahn, OBB

(the Austrian State-owned company) and Le Nord (the largest Italian regional

company, operating on the Bolzano-Verona route).

Whereas in the passenger sector, Trenitalia continues to hold a strong

dominant position, in the cargo sector a higher degree of competition can be

observed. Twenty seven companies are authorized to provide cargo services in

the country, and more than 10% of cargo services (in terms of train/km) are

provided by companies other than Trenitalia. In the more profitable cross-

border segment, the percentage is significantly higher (potentially reaching 25%

of the market).

In September 2008, NTV submitted a complaint to the Italian Competition

Authority (AGCM), alleging that RFI had abused its dominant position in the

railway infrastructure market by denying it access to (i) space within station

buildings and (ii) the train maintenance centre in Naples. The first complaint

against RFI was dismissed on the facts, as AGCM did not find sufficient

evidence that RFI had discriminated against NTV in relation to station facilities.

The second complaint was settled by means of commitments proposed by RFI

and accepted by AGCM. RFI had refused access to the maintenance centre on

the basis that the facility was already operating at capacity, but had offered to

380

Further information on the companies of the FS Group is available on its

website at www.ferroviedellostato.it.

381 Further information on NTV is available on its website at www.ntvspa.it.

http://www.ferroviedellostato.it/

http://www.ntvspa.it/

100


provide NTV with space adjacent to the railway station on which it could build

its own maintenance centre. NTV had initially accepted this proposal, but

subsequently took the view that this would prove to be unfeasible, because,

inter alia, construction of the new facility would not be in compliance with

local building regulations. After the local authority confirmed that there were no

regulatory barriers to construction of a maintenance facility, AGCM took the

view that RFI‘s proposals were sufficient to remedy any competition concerns.

AGCM therefore accepted and made binding in the form of commitments the

proposals offered by RFI, and consequently closed the competition case without

any finding of breach of the competition rules.382

The case can be interpreted in

a number of ways, each of which illustrates a difficulty that may arise in the

application of an open access regime: on the one hand, the risk that a vertically

integrated undertaking will discriminate against its downstream competitors

even where an open access regime is in place;383

on the other hand, the danger

that a new entrant will seek to use the competition rules strategically, in order to

further its own interests.384

In December 2011, the Italian Competition Authority opened proceedings

against FS and RFI on an alleged abusive conduct aimed at blocking new

entrant Arenaways‘ access to railway infrastructures.

6.11 Rail sector in the Netherlands

Railway infrastructure in the Netherlands is managed by ProRail, a State-

owned company which has responsibility for maintenance, construction,

capacity allocation and traffic control on the network.385

Pursuant to the 2005

Dutch Railway Act, ProRail holds the government concession to manage the

mainline rail network until 2015.386

The concession to operate the Betuweroute

382

For further details on this case, see L.S. Borlini, ―The Italian Antitrust

Authority finds no abusive conduct for travel facility access and accepts

commitments for maintenance area access (NTV/RFI-Accesso al Nodo di

Napoli)‖, 22 October 2009, e-Competitions, n°30037 and M. Giannino, ―The

Italian Competition Authority closes two investigations against the manager

of rail network group without finding any competition infringement

(NTV/RFI-Accesso al Nodo di Napoli)‖, 22 October 2009, e-Competitions,

n°29959, both available on www.concurrences.com.

383 See Borlini, cited fn. 382 above.

384 See Giannino, cited fn. 382 above.

385 Further information on ProRail is available on its website at www.prorail.nl.

386 See OECD, Roundtable on Concessions – Netherlands (2006).

http://www.concurrences.com/

http://www.prorail.nl/


101


freight rail line, which links the port of Rotterdam and the German border and

which was opened in 2007, is held by a private company, Keyrail, which is 50%

owned by Prorail with the remainder owned by the port authorities of

Rotterdam and Amsterdam.387

Passenger transport on the Dutch network is

similarly organised by means of concessions granted by the government to

operators.388

The State-owned railway undertaking, Nederlandse Spoorwegen

(NS), currently holds the concession to operate all mainline passenger services

in the Netherlands until at least 2015.389

Several private operators hold

concessions to operate passenger transport services on a number of regional, or

secondary, rail routes. Freight rail transport in the Netherlands is fully open to

competition. The rail regulator in the Netherlands is the Office of Transport

Regulation which is a division of the Dutch Competition Authority, the NMa.390

6.12 Rail sector in Slovenia

Slovenske železnice (SŽ) is the State-owned, incumbent rail company in

Slovenia, providing freight and passenger transport services as well as operating

the rail infrastructure. Currently, there is accounting separation between SŽ‘s

infrastructure and transport activities.391

However, the Slovenian Railway

Companies Act, passed in December 2010, puts in place the necessary legal

framework for the conversion of SŽ to a holding company. The stated

objectives of this new legislation are: to provide for the independence of the

infrastructure administrator in accordance with the requirements of the First

Railway Package; to secure the long-term financial viability of SŽ‘s transport

activities; and to establish a corporate structure that will enable the individual

companies to focus on core tasks and control costs.392

By law of 2009,

responsibility for the collection of track access charges has been transferred

387

Further information on Keyrail is available on its website at www.keyrail.nl.

388 OECD Roundtable on Concession – Netherlands, cited fn. 386 above.

389 OECD Roundtable on Concession – Netherlands, cited fn. 386 above.

Further information on NS is available on its website at www.ns.nl.

390 Further information on the Office of Transport Regulation, as well as Dutch

rail legislation and the railway sector, is available on the NMa‘s website at

www.nmanet.nl.

391 IBM, Rail Liberalisation Index 2007, published Brussels, 17 October 2007,

p.195.

392 See Government of the Republic of Slovenia press release, Draft Slovenian

Railway Company Act, published 14 October 2010.

http://www.keyrail.nl/



http://www.ns.nl/

http://www.nmanet.nl/

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from SŽ to the public rail regulatory agency.393

As of 2008, a private open

access railway undertaking, Adria Transport, has operated services on the

Slovenian network, offering in particular freight rail services to and from the

Port of Koper.

6.13 Rail sector in Spain

Following the entry into force of 2003 legislation regulating the railways

sector,394

the formerly vertically integrated State-owned railway company in

Spain, RENFE, has been vertically separated into two distinct companies. ADIF

(Administrator de Infraestructuras Ferroviairias) was established to act as

infrastructure manager, with responsibility for administering rail infrastructure,

managing traffic, distributing capacity and collecting access fees from railway

transport operators.395

RENFE-Operadora took over passenger and freight

transport operations.396

Both ADIF and RENFE-Operadora remain wholly

State-owned. The 2003 statute also required the creation of a rail regulator, the

Comité de Regulación Ferroviaria (CRF). Since the CRF is an internal

department within the Ministry of Development, however, it is argued to have

less independence than similar Spanish regulatory agencies, for example in the

energy and telecommunications sectors.397

6.14 Rail sector in Sweden

About 80% of the total railway network in Sweden is operated by the

State-owned infrastructure manager, while the remainder is administered by

companies, local authorities or associations.398

Prior to 2010, the State-owned

infrastructure manager took the form of a Swedish rail administration,

Banverket. At the end of 2009, Banverket‘s railway construction and

maintenance division, Banverket Production, was separated from its other

393

Railway Gazette International, ―Track access reforms approved‖, published

23 July 2009.

394 Ley del Sector Ferroviairio 39/2003 of 17 November 2003, which was

intended to fully transpose the EU rail liberalisation regime into Spanish law.

See J. Campos, ―Recent Changes in the Spanish Rail Model: the Role of

Competition‖ (2008) 7(1) Review of Network Economics 1, p.13.

395 Further information on ADIF is available on its website at www.adif.es.

396 Further information on RENFE-Operadora is available on its website at

www.renfe.com.

397 Campos, cited fn. 394 above, p.15.

398 Banverket, Annual Report 2009, p.2.

http://www.adif.es/

http://www.renfe.com/

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activities and converted into a separate company, Infranord AB. The Swedish

State has retained full ownership of Infranord AB.399

As of 1 April 2010, the

tasks formerly performed by Banverket were assumed by the new Swedish

transport administration, Trafikverket, which also performs the functions of the

previous Swedish road administration. Trafikverket is a public authority with

responsibility, inter alia, for long-term planning of the transport system for

road, rail, maritime and air traffic, as well as the construction, operation and

maintenance of public roads and railways.400

Even after liberalisation, the State-owned, dominant rail passenger

transport undertaking, SJ AB, retained monopoly rights covering substantial

portions of passenger services in Sweden.401

Currently, SJ AB has a market

share of about 90% of passenger transport on long-distance journeys (over 100

km), and about a 55% share of the total rail market in Sweden.402

In June 2009,

however, the Riksdag (Swedish Parliament) decided to open gradually the

market for rail passenger services. Thus, SJ AB‘s exclusive rights regarding

commercial passenger services on the State-owned railway system have been

revoked. As of 1 July 2009, weekend and holiday traffic was opened to

competition, along with the market for international passenger services on the

Swedish rail network as of 1 October 2009 (in accordance with the requirements

of Directive 2007/58/EC). On 1 October 2010, SJ AB‘s remaining monopoly

rights were removed, with all domestic passenger services being opened to

competition, with some exceptions for services between Stockholm Central and

Arlanda airport.403

During the winter of 2009/10, the Swedish rail transport system for both

passengers and freight suffered a large number of delays and disturbances

relating, in the first instance, to adverse weather conditions. An inquiry

commission was appointed by the Swedish government in March 2010 to

examine the reasons for the winter disturbance and make recommendations

regarding future preparedness. The interim report identified four problem areas

399

Banverket, Annual Report 2009, p.59. Further information on Infranord AB

is available on its website at www.infranord.se.

400 Further information on Trafikverket is available on its website at

www.trafikverket.se.

401 G. Alexandersson & S. Hultén, ―The Swedish Railway Deregulation Path‖

(2008) 7(1) Review of Network Economics 18, p.28.

402 Figures taken from SJ AB‘s website at www.sj.se, accessed 4 February 2011.

403 Banverket, Annual Report 2009, p.21. See also Å Torstensson, ―Railway

Developments in Sweden‖, (2009) European Railway Review, Issue 5.

http://www.infranord.se/

http://www.trafikverket.se/

http://www.sj.se/

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for the Swedish rail system: capacity, flexibility, division of roles and

information. The final report, published in October 2010, found shortcomings

on the part of both Trafikverket and rail market actors, with respect to integrated

planning, re-investment and maintenance. A number of the report‘s findings are

of particular relevance in the context of structural separation:

The operating agreements entered into for the use of rail infrastructure

contain insufficient incentives to encourage the parties concerned to

take preventive measures to avoid disruption. These operating

agreements should be redesigned in such a way as to improve the

stability and quality of rail services.

Revision of the contractual relations between station managers and

railway users is necessary—during the winter disruptions, the existing

arrangements had in many instances resulted in inadequate

information being conveyed to passengers.

Communication between the various actors in the railway sector

should be improved, in particular by improving IT capabilities in the

sector.

The combination of a disruption-sensitive rail network and an open

market has increased the risk of disruption—the report recommended

that key actors conduct joint training exercises to increase their

preparedness for further disruption scenarios.404

The government is now considering what measures should be taken as a

result of the report.

In an interesting cross-over concerning structural separation in different

sectors, it is worth noting that the railway infrastructure now managed by

Trafikverket includes an approximately 12,000km network of fibre-optic cables

that are laid alongside the tracks, which provides the railways with secure

telecom, data and signal services. Spare capacity on this network is hired out to

companies and authorities for data communication and mobile telephony.405

404

Förbättrad vinterberedskap inom järnvägen: Betänkande av Utredningen om

störningar i järnvägstrafiken vintern 2009/2010, published Stockholm,

October 2010, SOU 2010:69, available on the website of the Swedish

government at www.regeringen.se.

405 Banverket, Annual Report 2009, p.2.

http://www.regeringen.se/

105


6.15 Rail sector in the United Kingdom

The rail sector in the UK comprises an infrastructure manager, Network

Rail, which is a private sector organisation established as a company limited by

guarantee (for profit but not for dividend); an independent economic and safety

regulator, the Office of Rail Regulation; and private railway undertakings which

provide passenger and freight services. Virtually all domestic passenger services

in the UK are publicly specified and privately delivered by rail transport

undertakings operating under a public franchise. By contrast, the freight sector

is open to competition.406

Since privatisation (1993-7), there has been a 59%

increase in passenger journeys to 1.3 billion per year, and a 37% increase in

freight moved to 21 billion net tonne km per year.407

In 2007, the then Labour government published a White Paper on the

future of the rail sector. In this document, the government announced its

intention to switch the focus of rail policy, from correcting the ―flawed‖

institutional structure put in place during the privatisation period 1993-7,408

to a

forward-looking strategy with three principal components: increased capacity;

improved performance, including safety, reliability and efficiency; and

improved environmental impact.409

Whilst these policy objectives remain in

place, more recently the focus has turned to the costs of the rail sector. Overall

taxpayer funding for the rail sector in the UK (principally to Network Rail,

although certain loss-making franchise operators also receive direct government

subsidies)410

rose from £2.3 billion in 1993/4 to £5.2 billion in 2008/9, with the

largest increases occurring since 2002, a rate of increase considered

unacceptable and unsustainable.411

In 2009, the Department for Transport and

406

Department for Transport, White Paper: Delivering a Sustainable Railway,

Cm 7176, published July 2007, p.81.

407 Department for Transport/Office of Rail Regulation, Rail Value for Money.

Scoping study report, published 31 March 2010, p.13. For a review of the

literature concerning the impact of passenger rail franchising on productivity

and costs in the UK, see A.S.J. Smith, P.E. Wheat & C.A. Nash, ―Exploring

the effects of passenger rail franchising in Britain: Evidence from the first

two rounds of franchising (1997-2008)‖ (2010) 29 Research in Transport

Economics 72.

408 White Paper, cited fn. 406 above, p.15. It should be noted that the White

Paper nonetheless acknowledged that privatisation had brought ―some real

benefits‖ (p.15).

409 White Paper, cited fn. 406 above.

410 Scoping Study, cited fn. 407 above, p.15-16.

411 Scoping Study, cited fn. 407 above, p.6.

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the Office of Rail Regulation jointly commissioned a study into value-for-

money in the rail sector.412

The terms of reference for the study require, inter

alia, consideration of whether legal, operation or cultural barriers currently

stand in the way of efficiency and value for money, and whether incentives can

be created for different segments of the rail sector to generate greater

efficiency.413

The scoping study report published in March 2010 noted that the

study ―presents an opportunity to consider the railway in a whole-system

context,‖ and confirmed that it ―has no ‗no-go areas‘.‖414

Given that a key

priority for the study is to identify where structural change can deliver increased

efficiency,415

consideration will undoubtedly be given to whether the existing

vertically separated, wholly privatised structure should be altered, albeit any

proposed modifications to the current market structure must be in conformity

with EU law requirements. The study is scheduled to present its findings and

recommendations to the Secretary of State for Transport in March 2011.416

One

potential outcome of the study is the introduction of ―airline-style ticket

pricing‖—higher fares for peak and reduced fares for non-peak services—in

order to relieve congestion and make more efficient use of upgraded rail

infrastructure.417

The first high speed rail network in the UK, High Speed 1 (HS1),

commenced full operations in November 2007. The line links London-St

Pancras Station with the entrance to the Channel Tunnel in the South East of

England. HS1 was built by what was originally a private sector consortium,

London & Continental Railways (LCR), following a public selection procedure.

In June 2009, however, due to financial difficulties, the UK government

formally took control of LCR when its debt was transferred to the State.418

HS1

412

See Office of Rail Regulation, Press Release: ORR welcomes study

examining ways to improve value for money across the railway sector,

published 9 December 2009.

413 Department for Transport, Improving value for money from the railway -

Terms of reference, published 9 December 2009, available on the DfT‘s

website at www.dft.gov.uk.

414 Scoping Study, cited fn.407 above, p.8.



417 The Guardian, ―Rail Review Suggests Airline Pricing‖, published 7

December 2010.

418 Department for Transport Press Release, London & Continental Railways

Restructured, published 8 June 2009. Note that the UK was required to get

prior State aid clearance under EU law; see European Commission Press

http://www.dft.gov.uk/

107


Limited, a wholly owned subsidiary of LCR, has a 30 year concession to

operate HS1 and its stations. LCR also has a 40% shareholding in Eurostar

International, the railway transport undertaking that runs Eurostar services

between the UK and continental Europe.419

On 5 November 2010, it was

announced that the UK government had sold the rights to operate HS1 for a 30

year period to a consortium comprising Borealis Infrastructure and Ontario

Teachers‘ Pension Plan, for a total acquisition value of £2.1 billion. The

winning consortium will acquire ownership of HS1 Limited, whereas the State

retains ownership of the railway infrastructure and land.420

Deutsche Bahn has

recently expressed interest in operating services from London to continental

Europe via HS1 and the Channel Tunnel, raising the prospect of international

competition on the link for the first time.421

6.16 Rail sector in the United States

The United States has seven privately-owned, vertically integrated freight

railways, each classified as Class 1 with annual operating revenues of $401.4

million or more. In addition, as of 2008 there were 33 vertically integrated

regional railways (line-haul railroads operating at least 350 miles of track and/or

earning revenue between $40 million and the Class I threshold), and over 500

vertically integrated local railways (line-haul railways smaller than regional

railways).422

Intercity passenger rail services are provided by the publicly-

owned railway corporation, Amtrak, which operates over the tracks of the

Release, IP/09/793 Commission approves State aid to London & Continental

Railways and Eurostar, published 15 May 2009.

419 The other shareholders are SNCF, the French national rail company, which

holds 55%, and SNCB, the Belgian national rail company, which holds 5% of

Eurostar International. See www.eurostar.com for further information on the

company.

420 See High Speed 1 Press Release, UK Government Sells Right to Operate its

First High Speed Railway for £2.1BN, published 5 November 2010, available

on HS1‘s website at www.highspeed1.com/news.

421 Reuters, ―Deutsche Bahn pitches for Channel Tunnel routes‖, published 19

October 2010.

422 Office of Policy and Communication, Federal Railroad Administration,

Freight Railroads: Background Issue brief, published March 2010.

http://www.eurostar.com/

http://www.highspeed1.com/news

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freight rail networks.423

Amtrak also owns some of its own track in the North

East.

In September 2009, the US House Judiciary Committee approved

legislative plans to remove the broad antitrust exemptions that currently apply

in the rail sector, with similar efforts taking place in the Senate.424

Proponents of

the legislation view it as necessary to address the market power of the large

freight railways, and thereby increase competition and reduce shipping costs.

The proposed legislation is strongly opposed by railway companies.425

Nonetheless, in early 2011 the draft bill was approved by the Senate Judiciary

Committee, with plans to bring the legislation to the floor in the House and the

Senate later in the year.426

7. Corporate Incentives to Invest and Structural Separation

An issue of increasing prominence within the structural separation debate

is the impact of such arrangements on the incentives to invest for network

owners and operators. Although uncertainty regarding the regulatory

environment does not fully deter investment in network infrastructure, it can

lead to significant delays in investment as well as increased cost of capital.427

In

particular where a sector is in a developmental phase, the cost of capital is of

paramount importance, and in such circumstances it has been argued that ―any

policy-driven vertical separation needs to be justified through a cost-benefit

analysis with the primary focus on the cost of capital effects.‖428

Particularly in

423

Further information on Amtrak is available on its website at

www.amtrak.com.

424 Global Competition Review, ―House committee opposes railroad antitrust

exemptions‖, published online on 17 September 2009.

425 The Journal of Commerce, ―Lawmakers Unveil Accord on Rail Antitrust‖,

published 1 June 2009, available at www.joc.com. See also C. Sagers,

Competition Come Full Circle? Pending Legislation to Repeal the U.S.

Railroad Exemptions, Cleveland Marshall College of Law Research Paper

09-180, published September 2009.

426 Feed & Grain, ―Senate Committee Votes to End Railroads‘ Antitrust

Exemption‖, published 11 February 2011, available online at

www.feedandgrain.com.

427 See International Energy Agency, Climate Policy Uncertainty and Investment

Risk, published 2007.

428 D. Helm, Structural Separation and the Gas Industry in Europe, Paper for

Meeting of OECD Working Paper No.2 on Competition and Regulation,

dated 14 June 2010, p.8.

http://www.amtrak.com/

http://www.joc.com/

http://www.feedandgrain.com/

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light of the significant levels of investment required in many network industries

in the near future, the issue of corporate incentives to invest has become a key

consideration.

The issue of whether separation measures will impact negatively on

investment incentives has come to the fore in the telecommunications sector,

where very substantial investments are required over the coming years in order

to upgrade existing copper telecommunications networks to faster fibre

networks with greater capacity.429

In technical terms, the move to next

generation telecommunications networks, which bring greatly increased

network capacity compared with existing copper networks, has the potential to

foster much increased downstream competition, provided that competition-

friendly infrastructure is put in place at the initial stages.430

However, while

structural separation policies have proven successful at attracting investment

into downstream retail markets it has been suggested that regulatory uncertainty

regarding network ownership may have detrimental effects on levels of

investment higher up the chain: deterring network owners/operators from

investing in fibre out of a fear of later government intervention rendering such

investments far less profitable.431

In view of the high social benefit of

broadband development and the efficiency costs imposed by separation, some

commentators have questioned whether, going forward, vertical separation

429

That structural separation does not necessarily hamper capital intensive

investments is, for instance, demonstrated by Tunisia‘s Telecom sector where

intensive backbone infrastructure investments took place after unbundling.

430 Point-to-point as opposed to point-to-multipoint fibre; this is considered

further in the concluding section below. See also OECD, Next Generation

Networks and Market Structure: Outline, DSTI/ICCP/CISP(2010)5 for

detailed consideration of these issues.

431 See, for example, London Economics & PriceWaterhouseCoopers, An

Assessment of the Regulatory Framework for Electronic Communications –

Growth and Investment in the EU e-Communications Sector Final Report To

The European Commission DG Information Society and Media (2006), which

found that regulatory uncertainty was an important factor in explaining

investment decisions in the telecommunications sector, in particular reduced

investment by dominant firms. As discussed below, however, this argument

may have greater weight with respect to behavioural as opposed to structural

separation measures.

http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=DSTI/ICCP/CISP(2010)5

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remains an appropriate instrument of telecommunications market regulation in

light of improved regulatory oversight of the sector.432

While telecommunications present perhaps the clearest illustration of the

competition/investment incentives dichotomy, few sectors avoid the issue. In

the EU energy sector, for example, investments in the order of €1 trillion will be

required over the course of the next ten years.433

Given the European

Commission‘s expressed preference for full ownership unbundling in the

electricity and gas sectors, the compatibility of such an approach with its

concurrent need to attract these high levels of investment, particularly when

pursued in tandem with the EU‘s additional policy aims of security of supply

and sustainability, has been questioned.434

A related issue, in the electricity

context, is funding of the switch to ―smart grid‖ technology. Where the

transmission grid owner/operator is wholly separated from generation or

retailing activities, it may have little incentive to upgrade the network absent

regulatory pressures.435

Similarly, the rail sector has in some instances seen a

decline in infrastructure investment following the imposition of separation

measures, a state of affairs that has the potential to negate the positive social

consequences of increased competition and investment in the adjacent rail

services markets.

432

See, for example, B. Moselle & D. Black, ―Vertical Separation as an

Appropriate Remedy‖ (2011) 2(1) Journal of European Competition Law &

Practice 84, pp.88-89.

433 Communication from the Commission to the European Parliament, the

Council, the European Economic and Social Committee and the Committee

of the Regions, Energy 2020: A Strategy for Competitive, Sustainable and

Secure Energy, SEC(2010) 1346, COM(2010) 639 final, published 10

November 2010, at p.2.

434 See, for example, A. de Hauteclocque & V. Rious, ―Regulatory Uncertainty

and Inefficiency for the Development of Merchant Lines in Europe: A Legal

and Policy Discussion‖, in Delvaux, Hunt & Talus (eds.), EU Energy Law

and Policy Issues (2nd

ed), Brussels: Euroconfidential, 2010, at pp.163-182

for discussion of the impact of the EU‘s unbundling energy policies on

corporate incentives to invest in transmission infrastructure in Europe, and J.

Ishii & J. Yang, ―Investment Under Regulatory Uncertainty: US Electricity

Generation Since 1996‖ (2004) Centre for the Study of Energy Markets

Working Paper 127, University of California at Berkeley Energy Institute for

further evidence that regulatory uncertainty may lead to delayed investment

in the electricity sector.

435 OECD, Roundtable on Electricity: Renewables and Smart Grids

(DAF/COMP(2010)10).


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111


On the other hand, one may argue that the regulatory uncertainty concerns

hold greater weight with respect to behavioural separation measures as opposed

to structural ones. From this perspective, the prospect of full ownership

separation will actually have a less detrimental effect on incentives to invest

than, for example, functional separation. This is because, arguably, a potentially

pending structural separation will not affect corporate incentives if there is

sufficient interest in the part of the business to be divested and it can be sold at

full market value.

Structural separation measures can also have a positive effect on

investments: The ENI commitment decision highlights the risk that vertical

integration will lead to under-investment by the vertically integrated firm in its

infrastructure.436

Where an infrastructure owner is subject to mandatory access

requirements, it may choose to refrain from developing additional capacity on

its network, even in the face of considerable demand, in order to prevent its

downstream competitors from gaining access to the infrastructure necessary to

supply the downstream market.437

Alternatively, as has also been an issue in the

context of the switch to smart electricity grids, where the transmission system

owner remains part of a vertically integrated firm, it has an incentive to

implement network upgrades in a manner that excludes third parties from the

competitive segments.438

In such circumstances, structural separation is likely to

improve the infrastructure owner/operator‘s incentives to investment in the

facility, or to do so in a manner that facilitates competition in non-monopoly

sectors.

It is important to note, however, that it is not merely the degree of vertical

integration within a sector that informs the investment incentives of market

actors. The method of regulation, for example, can have a significant impact on

investment decisions.439

Moreover, in response to the recent global financial

436

For a discussion of strategic underinvestment see F. Maier-Rigaud, F. Manca

& U. von Koppenfels ―Strategic Underinvestment and Gas Network

Foreclosure – the ENI case‖, EU Competition Policy Newsletter, Issue 1,

2011.

437 While in general the incentives to foreclose depend in part on the access fees

the vertically integrated company is allowed to levy, it is not clear whether

any realistic increase in the regulated fees in the ENI case would have been

able to compensate the negative impact of more gas flowing into Italy on the

downstream profits of ENI.

438 See OECD, Roundtable on Electricity, cited fn. 435 above.

439 See, for example, C. Cambini & L. Rondi, ―Incentive Regulation and

Investment: Evidence from European Energy Utilities‖ (2010) 38 Journal of


112


crisis, many countries have included investment in network infrastructure (in

particular, next generation telecommunications networks) within national

economic recovery or stimulus plans, thus introducing a significant supra-

market dimension to such investment decisions.

The impact of structural separation on corporate incentives to invest

therefore remains an open question. It is an issue that requires full consideration

in the assessment of whether structural separation may be appropriate for a

sector, and thus warrants express inclusion in the list of factors to be taken into

account in the context of the 2001 Recommendation. Therefore, the

Recommendation will be modified to incorporate an express reference to

―effects on corporate incentives to invest‖ within the second paragraph of the

Recommendation‘s first part. This modification is highlighted in the text of the

Recommendation annexed to this report.

8. Conclusion

The 2001 Recommendation asks Member countries to consider carefully

the possibility of implementing structural separation in regulated sectors, in

order to bring the benefits of competition to potentially competitive activities

within these markets. As this update report has illustrated, both behavioural and

structural separation measures have been considered and/or implemented in

many Member countries. The 2001 Recommendation does not require the

implementation of structural separation; rather, it calls upon Member countries

to ―carefully balance the benefits and costs of structural measures‖ that are

likely to emerge from the introduction of competition into certain parts of a

regulated sector ―against the benefits and costs of behavioural measures‖

following any expert advice provided by relevant agency(ies) and competition

authorities on matters assigned to each of them in accordance with the law and

regulations in each jurisdiction. It further notes that while behavioural measures

―may not eliminate the incentive of the regulated firm to restrict competition

and therefore may be less effective in general at facilitating competition than

structural policies, […] they may play a useful and important role in supporting

certain policies such as access regulation‖.

In light of the experiences with structural separation within Member

countries in the decade since the adoption of the Recommendation, a number of

Regulatory Economics 1-26, and B. Égert, ―Infrastructure Investment in

Network Industries: The Role of Incentive Regulation and Regulatory

Independence‖ (2009) OECD Economics Department Working Papers, No.

688, OECD Publishing.

http://www.oecd-ilibrary.org/economics/infrastructure-investment-in-network-industries_225261508320



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broad conclusions may be advanced. First and foremost, structural measures

have been implemented successfully in numerous instances. Beyond

behavioural measures such as mandatory access requirements, structural

separation can play a pivotal role in ensuring that a formal right of access is

effective in practice. The resulting benefits have included increased investment,

particularly in the newly-opened competitive portions of the sector, as well as

increased consumer choice, improved services and lower pricing.

Secondly, the evidence indicates that there is no clear formula that can

dictate how structural separation should be implemented. While the

Recommendation itself called upon the Member countries to consider

implementation, the experiences show that structural separation has been

successfully implemented:

By vertically integrated firms acting voluntarily, whether in

anticipation of impending regulatory changes, to avoid a competition

law investigation or bring an end to on-going proceedings, or merely

as a rational business decision given market conditions;

As a regulatory measure, whether imposed by the national

government, by an independent national regulatory authority, or as a

policy measure stemming from a supra-national authority such as the

European Commission; and

Under competition law by a competition authority or the courts, in

order to bring an end to a breach of the competition laws.

Moreover, the form or degree of separation to be implemented is not

necessarily determinative of its success. On the one hand, structural separation

is frequently said to be preferred on the basis that it eliminates not only the

incentives but also the possibility of discrimination to the greatest extent, and

allows for the greatest regulatory simplicity after separation has been effected.

The European Commission‘s recent competition cases in the energy sector for

example show that behavioural separation and regulatory supervision alone may

not always effectively prevent infringements of competition law. On the other

hand, positive experiences have been reported with respect to behavioural

measures falling short of structural separation. This is particularly the case in

circumstances where the internal corporate structure of the integrated firm has

been revised to replicate, as far as possible, the effects of independent

ownership, for example where remuneration of relevant personnel is based

solely on the performance of the separated division. Even the least intensive

form of separation, accounting separation, may bring benefits insofar as it

allows for a clear attribution of costs and revenues, and therefore identifies price

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discrimination, even if it is of limited use in addressing forms of non-price

discrimination (such as strategic under-investment or degradation of the quality

of access services provided to third parties).

An important development, seen in the rail and telecommunications

markets in particular, is the use of public funds in the construction of next-

generation network infrastructure—for example fibre telecommunications

networks and high-speed rail networks. Government participation in such

projects typically encompasses objectives that fall outside the ambit of

competition policy, and are rarely shared by private investors, such as

increasing the take up of broadband in a country, improvement of regional

transport links or stimulating the economy after the global financial crisis. Even

though, once constructed, this infrastructure is not typically being administered

in the same manner as traditional State-owned monopoly assets but is instead

operated by the private sector, the characteristic monopoly infrastructure

concerns still arise. Policy makers should therefore consider requiring that when

public funds are used to support expansion of infrastructure, that new

infrastructure should give the public both better service and better choice of

providers.

The transfer from copper to fibre telecommunications networks, in

particular, brings with it the prospect of very significant increases in network

capacity but also risks solidifying market power and reducing potential

competition. The upgrade of telecommunications infrastructure from DSL to

VDSL includes a substantial increase in speed of connection to the household,

but where implemented as a point-to-multipoint solution, it has two notable

effects on competitors: it strands the assets of competitors that have been

installed in the main exchange, and it creates an environment in which further

investment by potential downstream competition in assets for reaching the end

consumer through unbundling becomes uneconomic. 440

There is a risk that, in

some cases, the installation of VDSL or point-to-multipoint fibre is a business

strategy designed to forestall downstream competition of the incumbent

operator, to the detriment of consumers. Competition authorities and national

regulators should be aware of the possibility that a purported network upgrade

may also be intended to serve as an exclusionary measure.

It would be misleading to conclude that every experience with separation

has been straightforward and wholly successful. In addition to the costs of

440

Incumbent telecommunications providers are not, in general, installing point-

to-point fibre, even though costs for installing point-to-point fibre in the UK

are estimated to be only 12% higher than the costs for installing point-to-

multipoint fibre.

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separation—both the once-off costs of breaking up the firm, as well as the costs

resulting from possible losses of economies of scope and scale441

—a frequent

fear is the potentially detrimental effect that structural separation has on

investment incentives, in particular large-scale investment in network

development and upgrading. The impact of separation policies on investment

incentives has been an issue throughout the sectors and in many of the Member

countries surveyed in this report. On the one hand, the regulatory uncertainty

resulting from the possibility that structural separation may be imposed on a

sector has the potential to chill corporate incentives to invest, such as the switch

to fibre telecommunications and high speed rail networks. On the other hand,

continued vertical integration may lead to strategic under-investment and

capacity limiting by the incumbent firm, in order to exclude downstream

competitors. The impact of structural separation on investment incentives

therefore remains an open question, and one deserving of full consideration in

assessing whether structural separation may be appropriate for a sector.

Competitive markets do not always follow or flourish even after the

implementation of structural separation. Where other barriers to entry remain,

de facto monopolies can persist, a problem that is perhaps more pronounced

where weaker, behavioural measures have been implemented. In New Zealand,

for example, the laws on structural separation in the electricity sector have

recently been revised to allow a degree of re-integration between distribution

and retailing, viewed as a necessary amendment in order to challenge the

continued market power of the combined generator-retailers, which has

persisted even after the implementation of structural separation. In Europe, a

notable development is the extent to which new entry has been effected by

incumbent firms from adjacent Member States—for example, the participation

by SNCF of France in the new high speed rail operator in Italy—or from

adjacent regulated sectors—for example, the successful entry by Bord Gáis, the

State-owned gas company, into the electricity sector in Ireland, in competition

with the State-owned incumbent ESB. Indeed, the European Commission has

recognised that the possibility of entry by firms with ―incumbency advantage‖

provides the greatest competitive constraint in many markets.442

Nonetheless,

some thought might be given to the extent to which such an approach merely

replaces monopoly with oligopoly.

441

See fn. 17 above on the issue of the economics of scope associated with

vertical integration.

442 Commission Decision of 09.12.2004 declaring a concentration to be

incompatible with the common market (Case COMP/M.3440 –

EDP/ENI/GDP), at paragraph 481.

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Furthermore, structural separation has, in a number of instances, resulted in

co-ordination problems between network operators and users. A lack of co-

ordination can lead to inefficient usage of infrastructure and, as some tragic

examples from the rail sector illustrate, can have serious negative consequences

in terms of performance and even safety. It is not clear whether this is an

inherent difficulty where there is structural separation of natural monopoly

industries, although it appears that difficulties can be minimised significantly

through more effective regulation and mechanisms of co-ordination. A distinct

but related problem is the use of network co-ordination mechanisms to

discriminate against certain users, an issue that has arisen for example in

relation to balancing markets for electricity networks. Market problems of this

nature have been addressed both through regulatory instruments and by

competition law enforcement. Particularly with behavioural measures,

regulatory supervision retains a crucial role in policing the functioning of the

market.

The effects of the global financial crisis have been felt in this policy area,

insofar as it has reduced in some instances the political will to effect structural

separation of publicly-owned assets because of a fear that the full value of the

infrastructure will not be realised upon sale. Nonetheless, there is some

evidence that, for example, energy firms in Europe are moving towards a

consolidation of their business activities even as they move into new geographic

markets, leading indirectly to structural separation as a result of the divestment

of non-core business activities. Particularly in the gas sector, some concerns

have been voiced that vertical separation and promotion of downstream

competition may not always be the appropriate strategies to pursue, given that

upstream supply is largely controlled by one or two producers. There is a risk

that breaking up downstream gas operations may weaken the bargaining power

of purchasers against suppliers. On the other hand, new sources of gas supply

(e.g. shale gas) may mitigate some of these risks.

A wide variety of market arrangements are to be found in the gas,

electricity, telecommunications and rail sectors of the new Member countries of

Chile, Estonia, Israel and Slovenia. For both Estonia and Slovenia, accession to

the EU in 2004 has necessitated the adoption of EU policies in all four of these

sectors. Chile has, historically, been at the vanguard of network industries

liberalisation, although developments in some sectors have occurred on a

regionalised basis which has resulted in regional monopolies. Apart from the

gas sector, the three remaining network industries in Israel considered in the

report remain vertically integrated.

Consideration of the experiences with structural separation set out in this

report leads to the conclusion that the 2001 Recommendation continues to have

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significant relevance a decade after its adoption. Structural separation of

vertically integrated firms operating in regulated network industries can bring

about the introduction of meaningful competition in the competitive activities of

regulated sectors, while at the same time eliminating, or at least lessening, the

need for regulatory supervision of market actors. Moreover, structural

separation does not, a priori, prevent or interfere with the pursuit of non-

efficiency based goals, such as regional development or environmental

protection. On the other hand, structural separation is a remedy that is not

appropriate for all markets or circumstances. It can involve a trade-off between

competition and efficiency that depending on the existing market conditions

may or may not, ultimately, bring economic and public benefits that justify its

implementation. In particular, the impact of structural separation on corporate

incentives to invest is an important issue that warrants its express reference in

the Recommendation among the potential costs and benefits of structural

separation.

The 2001 Recommendation asks Member countries to consider imposing

structural separation after a positive outcome of the balancing exercise.

Structural separation should be implemented only when it is beneficial to do so,

bringing substantial benefits to consumers and the wider economy. A decade on

from its adoption by the OECD Council, the evidence from country experiences

confirms the logic and continued applicability of the Recommendation: where

the benefits and costs of structural separation outweigh the benefits and costs of

behavioural measures, Member countries should give genuine consideration to

implementing structural policies in the regulated market concerned.

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ANNEX

RECOMMENDATION OF THE COUNCIL CONCERNING

STRUCTURAL SEPARATION IN REGULATED INDUSTRIES

[C(2001)78/FINAL]

As amended on 22 November 2011 [C(2011)135 and CORR1]

THE COUNCIL,

Having regard to Article 5 b) of the Convention on the Organisation for

Economic Co-operation and Development of 14 December 1960;

Having regard to the agreement reached at the 1997 Meeting of the

Council at Ministerial level to reform economic regulations in all sectors to

stimulate competition [C/MIN(97)10], and in particular to:

―i) Separate potentially competitive activities from regulated utility

networks, and otherwise restructure as needed to reduce the market power of

incumbents;

ii) Guarantee access to essential network facilities to all market entrants on

a transparent and non-discriminatory basis‖;

Having regard to the 2001 report Structural Separation in Regulated

Industries [DAFFE/CLP(2001)11], the Report on Experiences with Structural

Separation [C(2006)65] and the report on Recent Experiences with Structural

Separation [C(2011)135, Annex I and CORR1];

Recognising that there are differences in the characteristics of industries

and countries, differences in the processes of regulatory reform and differences

in the recognition of the effectiveness of structural measures, behavioural

measures and so on, and that such differences should be taken into account

when considering structural issues;

http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=C(2001)78/FINAL


http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=C/MIN(97)10

http://www2.oecd.org/oecdinfo/info.aspx?app=OLIScoteEN&Ref=DAFFE/CLP(2001)11



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Recognising that regulated firms, especially in network industries, often

operate in both non-competitive and in competitive complementary activities;

Recognising that the degree of competition which can be sustained in the

competitive complementary activities varies, but that when these activities can

sustain effective competition it is desirable to facilitate such competition as a

tool for controlling costs, promoting innovation, and enhancing the quality of

the regulation overall, ultimately to the benefit of final users and consumers;

Recognising that, in this context, the regulated firm has the ability, in the

absence of antitrust or regulatory controls, to restrict competition by restricting

the quality or other terms at which rival upstream or downstream firms are

granted access to the services of the non-competitive activity, restricting the

capacity of the non-competitive activity so as to limit the scope for new entry in

the complementary activity, or using regulatory and legal processes to delay the

provision of access;

Recognising that, depending upon the structure of the industry, a regulated

firm which operates in both a non-competitive activity and a competitive

complementary activity may also have an incentive to restrict competition in the

complementary activity;

Recognising that such restrictions of competition generally harm efficiency

and consumers;

Recognising that there are a variety of policies that can be pursued which

seek to enhance competition and the quality of regulation by addressing the

incentives and/or the ability of the regulated firm to control access. These

policies can be broadly divided into those which primarily address the

incentives of the regulated firm (such as vertical ownership separation or club or

joint ownership), which may be called structural policies, and those which

primarily address the ability of the regulated firm to deny access (such as access

regulation), which may be called behavioural policies;

Considering that behavioural policies, unlike structural policies, do not

eliminate the incentive of the regulated firm to restrict competition;

Considering that despite the best efforts of regulators, regulatory controls

of a behavioural nature which are intended to control the ability of an integrated

regulated firm to restrict competition may result in less competition than would

be the case if the regulated firm did not have the incentive to restrict

competition;

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Considering that, as a result, the efficiency and effectiveness of regulation

of the non-competitive activity, the available capacity for providing access, the

number of access agreements and the ease with which they are reached and the

overall level of competition in the competitive activity may be higher under

structural policies;

Considering that, under such circumstances, it is all the more necessary

that, to prevent and tackle restrictions of competition, competition authorities

have appropriate tools, in particular the capacity to take adequate interim

measures;

Considering that certain forms of partial separation of a regulated firm

(such as accounting separation or functional separation) may not eliminate the

incentive of the regulated firm to restrict competition and therefore may be less

effective in general at facilitating competition than structural policies, although

they may play a useful and important role in supporting certain policies such as

access regulation;

Recognising that, in some circumstances, allowing a regulated firm

operating in a non-competitive activity to compete in a complementary

competitive activity allows the regulated firm to attain significant economic

efficiencies or to provide a given level of universal services or service

reliability;

Recognising that structural decisions in regulated industries often require

sensitive, complex, and high-profile trade-offs, requiring independence from the

regulated industry and requiring expertise, experience, and transparency in

assessing competitive effects and comparing these with any economic

efficiencies of integration; and

Recognising that the boundaries between activities which are potentially

competitive and activities which may be non-competitive are subject to change

and that it would be costly and inefficient to continuously adjust the degree of

vertical separation;

I. RECOMMENDS as follows to Governments of Members:

1. When faced with a situation in which a regulated firm is or may in the future

be operating simultaneously in a non-competitive activity and a potentially

competitive complementary activity, Members should carefully balance the

benefits and costs of structural measures against the benefits and costs of

behavioural measures.

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The benefits and costs to be balanced include the effects on competition,

effects on the quality and cost of regulation, effects on corporate incentives to

invest, the transition costs of structural modifications and the economic and

public benefits of vertical integration, based on the economic characteristics of

the industry in the country under review.

The benefits and costs to be balanced should be those recognised by the

relevant agency(ies) including the competition authority, based on principles

defined by the Member. This balancing should occur especially in the context of

privatisation, liberalisation or regulatory reform.

2. For the purposes of this Recommendation:

a) A ―firm‖ includes a legal entity or a group of legal entities where the

degree of inter-linkages (such as shareholding) among the entities in

the group is sufficient for these entities to be considered as a single

entity for the purposes of national laws controlling economic

concentrations;

b) A ―regulated firm‖ is a firm, whether privately or publicly owned,

which is subject to economic regulation intended to constrain the

exercise of market power by that firm;

c) A ―non-competitive activity‖ is an economic market, defined

according to generally accepted competition principles, in which, as a

result of regulation or underlying properties of demand and supply in

the market, one firm in the market has substantial and enduring market

power;

d) A ―competitive activity‖ is an economic market, defined according to

generally accepted competition principles, in which the interaction

among actual and potential suppliers would act to effectively limit the

market power of any one supplier;

e) ―Complementary‖ is used in the broad sense to include products (and

services) that enhance each other. Products that are complementary to

the regulated firm's non-competitive activity therefore include (1)

products bought by the firm from (upstream) suppliers, (2) products

sold by the firm to (downstream) customers, and (3) other products

used in conjunction with the firm's non-competitive product, and

where competitors' success in providing such products depends on

their or their customers' ability to obtain access to the non-competitive

product.

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II. INSTRUCTS the Competition Committee:

1. To serve, at the request of the Members involved, as a forum for

consultations on the application of the Recommendation; and

2. To review Members' experience in implementing this Recommendation and

to report to the Council within three years as to the application of this

Recommendation and any further need to improve or revise the

Recommendation.

III. INVITES non-Members adhere to this Recommendation and to implement

it.